THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 

SCHOOL  OF  LAW 


k 


GIFT  OF 

Charles  Goldring 


PRINCIPLES  OF  ECONOMICS 


J 


M/^ 


THE  MACMILLAN  COMPANY 

NKW  YORK   •    BOSTON   •    CHICAGO   •    DALLAS 
ATLANTA   •    SAN    FRANCISCO 

MACMILLAN  &  CO.,  Limited 

LONDON  •  BOMBAY  •  CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  Ltd. 

TORONTO 


PRINCIPLES  OF  ECONOMICS 


BY 


F.  W.  TAUSSIG,  Ph.D.,  Litt.D.,  LL.D. 

HENRY    LEE    PR0FES80K   OF   ECONOMICS 
IN   HARVARD   UNIVERSITY 


VOLUME  II 
THIRD  EDITION  REVISED 


THE  MACMILLAN   COMPANY 
1923 

All  rights  resewed 


T 


COPTBIGHT,   1911,   1915,   1921, 

By  the  macmillan  company. 


Set  up  and  electrotyped.     Third  edition  published  December,  1921= 


PRIXTEl)    IN   THK    UNITED   STATES   OP   AMERICA 


VOL.   II 
PAGES 


3-19 


CONTENTS 

VOLUME  II 

BOOK  V 
THE  DISTRIBUTION  QF  WEALTH 

CHAPTER  38 
Interest  on  Capital  used  in  Production.      The  Conditions  of 
Demand  •■••■■'' 

Section  1.  What  is  meant  by  distribution.  The  meaning  of  the 
term  "capital,"  3  -  Sec.  2.  There  is  no  such  thmg  as  capital  dis- 
tinct from  capital  goods,  6  -  Sec.  3.  The  essential  problem  as  o 
interest  ^lonev  is  not  the  cause  of  interest,  nor  does  its  quantity 
affect'the  rate  of  interest,  7  -  Sec.  4.  Why  there  is  a  demand  for 
present  means;  the  effectiveness  of  the  time-usmg  processes  o 
production.  Is  capital  productive?  9  -  Sec.  5.  How  the  marginal 
effectiveness  or  productivity  of  capital  determmes  the  rate  of 
return.  A  consumer's  surplus  arises  from  the  more  effective  appli- 
cations. Analogy  to  the  problems  of  value  and  utility,  11  -  Sec.  6. 
Is  there  a  general  tendency  to  duninishing  returns  from  successive 
doses  of  capital?  14 -Sec.  7.  Human  direction  indispensable  to 
successful  operation  of  the  capitalistic  process.  The  human  factor 
often  neglected  in  reasoning  on  this  subject,  18. 

CHAPTER  39 
Interest,  continued.  The  Equilibrium  of  Demand  and  Supply  .  20-33 
Section  1.  Accumulation  of  present  means  needs  an  mducement, 
20  —  Sec  2  The  gradations  in  the  disposition  to  save.  Cases 
where  the  inducement  needs  to  be  sUght,  21  -  Sec.  3.  Cases  where 
a  return  is  sought.  Possibility  that  a  lowered  return  will  some- 
times induce  larger  savings.  More  often,  lowered  return  «hecfe 
saving  The  conception  of  marginal  savers,  24  — bee.  4  dia- 
grams expressing  the  equilibrium  of  supply  and  demand.  Savers 
surnlus  27  —  Sec.  5.  The  steadiness  of  the  rate  of  interest  m 
modern  times  and  its  significance,  30  -  Sec.  6.  The  race  between 
accumulation  and  improvement,  32. 


vi  CONTENTS 


CHAPTER  40 


VOL.  II 
PAGES 


Interest,  Further  Considered     .......  34-50  ^ 

Section  1.  Loans  for  consumption  introduce  no  new  principle  as 
to  demand,  but  are  much  affected  by  the  absence  of  full  competi- 
tion, 34  —  Sec.  2.  Public  borrowing  for  wars  an  importan  form  of 
such  loans  in  modern  times.  Great  wars  and  war  borrowing  give 
rise  to  both  economic  and  fiscal  problems.  For  the  problem  of 
interest,  the  economic  effects  are  important,  37  —  Sec.  3.  Durable 
consumer's  goods,  as  a  fqrm  of  investment,  again  introduce  no  new 
principle,  40  —  Sec.  4.  No  grounds  for  distinguishing  between  pro- 
ducer's capital  and  consumer's  capital,  so  far  as  interest  is  con- 
cerned. Exchange  of  present  for  future  the  most  general  statement 
of  the  cause  of  interest,  43  —  Sec.  5.  The  mechanism  of  banking 
and  credit  makes  interest  all-pervasive,  44  —  Sec.  6.  Variations  in 
the  rate  of  interest  in  different  countries  and  for  different  invest- 
ments, 45  —  Sec.  7.  The  justification  and  social  significance  of 
interest,  48. 

CHAPTER  41 

OVERPRODtrCTION  AND  OVERINVESTMENT  ......    51-61 

Section  1.  Overproduction,  in  the  sense  of  excess  beyond  the 
possibility  of  use,  is  impossible.  The  extensibility  of  wants,  51  — • 
Sec.  2.  Overproduction,  in  the  sense  of  production  beyond  the 
stage  of  profit,  is  possible  if  investment  proceeds  unendingly.  The 
process  of  advances  to  laborers  and  the  readjustment  of  production 
under  the  supposed  conditions.  Check  to  the  extreme  results, 
from  the  cessation  of  accumulation.  The  reasoning  of  Rodbertus 
criticized,  53  —  Sec.  3.  A  real  tendency  to  overproduction,  thru 
overinvestment  in  the  familiar  industries,  58  —  Sec.  4.  Industries 
with  large  plants,  best  managed  under  continuity  of  operation,  are 
tempted  to  overproduction  or  else  to  combination,  59  —  Sec.  5. 
The  phenomena  of  crises  and  industrial  depression  are  in  reality 
different  from  those  of  overproduction,  60. 

CHAPTER  42 
Rent,  Agriculture,  Land  Tenure         .         .         .         .         .         .  62-82 

Section  1.  The  theory  of  surplus  produce  or  "rent."  Rent  does 
not  enter  into  the  price-determining  expenses  of  production.  Rent 
is  not  the  specific  product  of  land,  62  —  Sec.  2.  The  existence  of 
rent  is  dependent  upon  diminishing  returns  from  land.  Advantages 
of  situation  as  affecting  rent,  65  —  Sec.  3.  Qualifications  of  the 
principle  of  diminishing  returns:  a  possible  stage  of  increasing 
returns;   specific  plots  alone  to  be  considered;   proposition  refers 


CONTENTS  vii 

VOL.  II 
PAGES 

to  physical  quantity  of  produce,  not  to  value;  a  given  stage  of 
agricultural  skill  assumed,  68  —  Sec.  4.  The  stage  when  the  ten- 
dency to  diminishing  returns  is  sharp,  72  —  Sec.  5.  Are  there 
original  and  indestructible  powers  of  the  soil?  Predatory  cultiva- 
tion; intensive  and  extensive  agriculture.  Inherent  differences 
tend  to  be  lessened,  but  do  not  disappear,  73  —  Sec.  6.  Land 
tenure.  Cultivation  by  owners,  each  with  moderate  holdings,  of 
greatest  social  advantage,  77  —  Sec.  7.  Should  the  community 
appropriate  or  retain  for  itself  agricultural  rent?  80. 

CHAPTER  43 

Urban  Site  Rent 83-97 

Section  1.  How  rent  arises  on  sites  for  retail  trading,  wholesale 
trading,  manufacturers,  dwellings,  83  —  Sec.  2.  The  principle  of 
diminishing  returns  on  urban  sites ;  its  operation  less  steep  than  for 
agricultural  land,  87  —  Sec.  3.  Site  rent  depends  upon  shrewdness 
in  utilization.  The  activity  of  real  estate  speculators,  89  —  Sec.  4. 
When  capital  is  sunk  irrevocably  in  the  soil,  there  is  difficulty  in 
separating  rent  from  return  on  capital.  How  far  ground  rent  is 
identical  with  economic  rent,  91  —  Sec.  5.  How  far  the  activity  of 
real  estate  dealers  and  speculators  is  productive,  94  —  Sec.  6. 
Urban  rent  is  sometimes  deliberately  created;  is  it  then  economic 
rent?  95. 

CHAPTER  44 

REiiT,  concluded     .........         .98-112 

Section  1.  The  rent  of  mines,  how  influenced  by  risk,  98 — ■ 
Sec.  2.  Diminishing  returns  in  mines,  100  —  Sec.  3.  A  remining  roy- 
alties rent?  102  —  Sec.  4.  The  selling  price  of  a  site  is  a  capitalization 
of  its  rent,  103  —  Sec.  5.  The  problem  of  appropriating  rent  for 
the  public  is  presented  most  sharply  by  urban  sites.  The  possibility 
of  leases  on  long  term  by  the  state;  the  historic  1  development  of 
unqualified  private  owners  ip  and  of  vested  rights,  104  —  Sec.  6. 
The  future  increase  of  rent  a  proper  object  of  taxation,  but  presents 
many  difficulties.    Modes  of  levying  such  taxes,  108. 

CHAPTER  45 
Monopoly  Gains -      113-121 

Section  1.  Absolute  monopolies;  industrial  monopolies.  Patents 
and  copyrights  as  instances  of  absolute  monopolies;  the  grounds  for 
creating  them  by  law,  113  —  Sec.  2.  "Public  service"  monopolies. 
Increasing  returns  and  increasing  profits,  116  —  Sec.  3.  Combina- 
tions and  "Trusts " ;  uncertainty  as  to  the  extent  of  their  monopoly 
power,  118  —  Sec.  4.  The  capitalization  of  monopoly  gains  and 
problems  as  to  vested  rights,  120. 


viii  CONTENTS 

CHAPTER  46  vol.  ii 

PAGES 

The  Nature  and  Definition  of  Capital       ....  122-130 

Section  1.  Is  the  distinction  between  interest  and  rent  tenable, 
in  view  of  the  wide  extent  of  differential  gains  of  a  monopoly  sort? 
Grounds  for  maintaining  that  all  returns  from  property  of  any  kind 
are  homogeneous,  122  —  Sec.  2.  A  different  conception  of  "rent" 
and  "interest,"  the  two  being  regarded  as  different  ways  of  stating 
the  same  sort  of  income.  "Artificial "  and  "  natural "  capital.  How 
measure  the  amount  of  capital?  124  —  Sec.  3.  The  important 
iiuestions  are  on  the  effectiveness  of  competition,  the  existence  of  a 
normal  rate  of  interest,  the  justification  of  interest,  127. 

CHAPTER  47 

Differences  of  Wages.  Social  Stratification  .  .  .  131-152 
Section  1.  Differences  of  wages  which  serve  to  equalize  attrac- 
tiveness of  different  occupations;  domestic  servants,  universii-y 
teachers,  public  employees,  131  —  Sec.  2.  Irregularity  of  employ- 
ment and  risk  in  their  effect  on  relative  wages.  Expense  of  training, 
133  —  Sec.  3.  Obstacles  to  free  movement  bring  about  real  differ- 
ences. Full  monopoly  rare,  135  —  Sec.  4.  Expense  of  education  as 
an  obstacle  to  mobility,  136  —  Sec.  5.  Inequalities  of  inborn  gifts 
and  social  stratification.  Uncertainty  of  our  knowledge  concerning 
the  influence  of  inborn  gifts,  137  —  Sec.  6.  Non-competing  groups, 
roughly  analyzed  as  five.  The  broad  division  between  soft-handed 
and  hard-handed  occupations,  141  —  Sec.  7.  Tendency  to  greater 
mobility  in  modern  times.  The  position  of  common  laborers,  144  — ■ 
Sec.  8.  Wliat  differences  in  wages  would  persist  if  all  choice  were 
free?  148  —  Sec.  9.  Why  the  wages  of  women  are  low,  and  wherein 
the  labor  of  women  is  socially  advantageous,  149. 

CHAPTER  48 

Wages  and  Value 153-163 

(  Section  1.  "Expenses  of  production"  and  "cost  of  production" 
again  considered.  If  there  were  perfect  freedom  of  choice  among 
laborers,  value  would  be  governed  by  cost,  153  —  Sec.  2.  There 
l)eing  non-competing  groups,  demand  (marginal  utility)  governs 
relative  wages.  How  this  principle  applies  to  a  grade  or  group; 
marginal  indispensability,  155  —  Sec.  3.  Qualifications:  earnings 
may  be  so  divergent  as  to  cause  seepage  from  on-^  group  into  an- 
other; the  standard  of  living  may  affect  numbers  within  a  group, 
158  —  Sec.  4.  The  lines  of  social  stratification  are  stable;  hence 
changes  from  the  existing  adjustments  of  value  are  not  usually 
affected  by  them,  159  —  Sec.  5.  The  theory  of  international  trade 


OfNTENTS  IX 


PAGES 


brought  int«  harra.ny  with  the  theary  of  value  under  U9u-cuuipet- 
ing  groups,  IGl  —  Sec.  6.  Anal«gies  between  international  trade 
and  domestic  trade,  162. 

CHAPTER  4# 

„                                                                             .         .         164-179 
r.trsiNESS  Profits 

Section  1.  Business  profits  rest  on  the  assumption  of  risks.  The 
term  "profits,"  164  —  Sec.  2.  Position  of  the  business  man  as 
receiver  of  a  residual  income.  Irregularity  and  wide  range  of  this 
income,  its  relation  to  prices.  Tho  irregular,  it  is  not  due  to  chance, 
IQQ  _  Sec  3.  The  part  played  by  inborn  abiUty;  that  played  by 
opportunity,  environment,  training,  169 -Sec.  4.  The  qualities 
requisite  for  success:  imagination,  judgment,  courage.  Mechanical 
talent  not  so  important  as  might  be  expected.  Relations  of  the 
business  man  to  inventors.  Diversity  of  qualities  among  the  suc- 
cessful, 170  —  Sec.  5.  A  process  of  natural  selection  among  busmes.s 
men.  Natural  capacity  tells  more  than  in  most  occupations,  17::; 
—  Sec.  6.  Motives  of  business  activity  and  money-making.  Social 
ambition  the  main  impulse;  other  motives  are  also  at  work,  175  — 
Sec.  7.  What  changes  would  occur  if  business  ability  were  very  plen- 
tiful and  capacity  for  muscular  labor  very  scarce,  177. 

CHAPTER  50 

Business  Profits,  continued 180-198 

Section  1.  Analogy  between  business  profits  and  rent.    A  similar 
analogy  in  other  occupations.    How  far  the  element  of  risk  vitiates 
the  analogy,  180  —  Sec.  2.  The  difference  in  business  abilities  ex- 
plains differences  in  cost  of  production.     The  conception  of  the 
"representative  firm"  as  settling  normal  expenses  of  production, 
183  _  Sec.  3.    One  of  the  manifestations  of  busmess  ability  is  in  the 
selection  of  good  natural  resources.    In  the  end,  an  important  dif- 
ference between  economic  rent  and  differential  business  profits, 
185  — Sec.  4.   The  connection  between  the  return  on  capital  and 
business  profits.     Relations  between  owners  and  managers    of 
capital  at  different  times.     Modern  tendency  towards  a  separa- 
tion  of  functions  and  rewards,  187 -Sec.  5.    For  considerable 
periods,    command  of    capital  brings  in  a    given  enterprise  the 
probability  of  larger  profits;    but  not  in  the  long  run  without 
business  ability,  189  —  Sec.  6.  For  industry  as  a  whole  and  capital 
as  a  whole  there  is  a  connection  between  interest  and  business 
profits     How  thev  may  diverge  in  the  end,  190  —  See.  7.   A  view 
of  business  profits  which  distinguishes  them  sharply  from  wages, 
as   arising  solelv  in   a  dynamic    state,    192 -Sec.    8.     Another 
view   whicli  lays  emphasis  on  risk,  and   distinguishes   between 


X  CONTENTS 

VOL.  n 

PAGES 

the  wages  of  salaried  managers  and  the  "profits"  of  independent 
business  men.  The  salaried  manager  often  rewarded  de  facto  in 
proportion  to  "profits,"  193  —  Sec.  9.  Legitimate  and  illegitimate 
business  profits.  Their  restriction  within  the  legitimate  limits  de- 
pends on  the  removal  of  monopoly  gains  and  the  maintenance  of  a 
high  plane  of  competition,  195. 

CHAPTER  51 

Great  Fortunes 199-207 

Section  1.  The  development  of  large-scale  production  and  the 
growth  of  numbers  have  been  the  fimdamental  causes  of  the 
growth  of  great  fortunes,  199  —  Sec.  2.  The  scarcity  of  high  busi- 
ness ability  explains  great  fortunes  accumulated  out  of  business 
profits,  200  —  Sec.  3.  Influences  of  a  different  kind  are  urban  site 
rent,  the  exploitation  of  rich  natural  resources,  monopoly  gains. 
Unearned  and  fortuitous  fortunes,  202  —  Sec.  4.  Unearned  gains 
are  mingled  inextricably  with  earned,  203  —  Sec.  5.  Large  for- 
tunes as  a  spur  to  productive  activity.  The  building  of  plants  and 
of  fortunes  out  of  accruing  profits,  205  —  Sec.  6.  The  need  of  better 
direction  of  economic  and  social  forces,  207. 

CHAPTER  52 

The  General  Level  of  Wages 208-224 

Section  1.  The  fundamental  question  on  the  general  level  of 
wages  is  raised  by  the  case  of  hired  laborers,  208  —  Sec.  2.  The  no- 
tion that  lavish  expenditure  creates  demand  for  labor  and  makes 
wages  high.  Consequences  of  investment  as  compared  with  "ex- 
penditure," 209  —  Sec.  3.  The  fallacy  of  "making  work."  Why 
hired  laborers  universally  desire  that  employment  should  be 
created  and  dislike  labor-saving  appliances,  210  —  Sec.  4.  The 
theory  of  the  specific  product  of  labor  as  determining  wages,  213  — 
Sec.  5.  Wages  depend  on  the  discounted  marginal  product  of  labor. 
Explanation  of  "margin"  and  of  "discount."  Advances  to  labor- 
ers, 214  —  Sec.  6.  Some  qualifications.  (1)  The  current  rate  of 
interest  is  assumed  to  be  settled  by  time  preference;  otherwise  there 
is  reasoning  in  a  circle.  (2)  A  broad  competitive  margin  is  assumed, 
otherwise  there  is  no  settlement  either  of  interest  or  of  wages,  216 
—  Sec.  7.  The  mechanism  of  advances  to  laborers,  the  flow  of  real 
income  into  their  hands,  the  reservoir  of  existing  supplies,  the  re- 
placement of  what  is  advanced,  218  —  Sec.  8.  With  the  increasing 
complexity  of  production  interest  tends  to  be  a  larger  part,  wages 
a  smaller  part,  of  the  total  income  of  society,  221  —  Sec  9.  The 
theory  of  general  wages,  tho  it  seems  remote  from  the  problem  of 
real  Ufe,  is  of  high  importance  for  the  great  social  questions,  222. 


CONTENTS  xi 

CHAPTER  53  vol.  n 

PAGES       ^,^ 

PoPtriiATiON  hKo  THE  SuppLY  OF  Labor  ....  225-240 

Section  1.  The  Malthusiaa  theory,  how  far  strengthened  by  bio- 
logical science,  225  —  Sec.  2.  The  maximum  birth  rate,  the  minimum 
death  rate,  the  consequent  possibilities  of  multipHcation.  In  what 
sense  there  is  a  tendency  to  rapid  multiplication;  the  positive  and 
preventive  checks,  226  —  Sec.  3.  The  actual  birth  rates  and  death 
rates  of  some  coimtries  in  modern  times.  A  Iiigh  birth  rate  ordi- 
narily entails  a  high  death  rate.  Explanation  of  exceptions.  The 
situation  in  the  United  States,  230  —  Sec.  4.  Does  a  high  birth  rate 
cause  low  wages,  or  vice  versa?  Interaction  of  causes.  A  limitation 
of  numbers  not  a  cause,  but  a  condition,  of  general  prosperity  and 
hig'i  w;  ges,  236  —  Sec.  5.  The  standard  of  living  aflfects  wages, 
not  directly,  but  thru  its  influence  on  numbers.  Fallacies  on  this 
subject,  237  —  Sec.  6.  Mode  in  which  the  modern  decline  in  the 
birth  rate  has  taken  place,  239. 

CHAPTER  54  ^^^ 

Population,  co  tinned  ........         241-252 

Section  1.  Differences  between  social  strata  in  birth  rates,  and 
their  relation  to  varying  standards  of  living,  241  —  Sec.  2.  The 
main  cause  of  the  general  tendency  to  lower  birth  rates  is  social  am- 
bition. Its  connection  with  private  property  and  individualism. 
Illustration  from  native-born  and  immigrants  in  the  United  States, 
245  —  Sec.  3.  Is  the  preventive  check  being  carried  too  far? 
Eugenics  and  race  suicide,  249. 

CHAPTER  55  ^^ 

Inequality  and  its  Causes.  Inheritance  ....  253-277 
Section  1.  The  fact  of  inequality:  distribution  has  a  roughl}' 
pjTamidal  form.  Figures  indicating  the  distribution  of  income  for 
Prussia,  for  Great  Britain,  for  London,  253  —  Sec.  2.  The  distribu- 
tion of  property,  as  indicated  by  probates  in  Great  Britain,  by  tax 
statistics  in  Prussia,  257 — Sec.  3.  The  distribution  of  income  in  the 
United  States,  258  —  Sec.  4.  Is  inequaUty  becoming  greater?  263 
—  Se  ■.  5.  The  causes  of  inequaUty:  differences  in  inborn  gifts;  the 
maintenance  of  acquired  advantages  thru  opportunity  and  above 
all  thru  inheritance,  265  —  Sec.  6.  Inheritance  to  be  justified  as 
essential  f  r  the  m  int  nance  of  capital  under  a  system  of  private 
property,  267  —  Sec.  7.  Possible  limitations  of  inheritance,  thru 
taxation  and  in  other  ways,  268  —  Sec.  8.  Proposals  for  the  radical 
restriction  of  inheritance,  269  —  Sec.  9.  The  grounds  on  which 
private  property  rests.  The  utilitarian  reasoning,  273  —  Sec.  10. 
The  leisure  clas-;  its  economic  and  moral  position,  275. 

References  on  Book  V 277-278 


xii  CONTENTS 

BOOK  VI 
PROBLEMS  OF  LABOR 

CHAPTER  56  vol.  ii 

PAGES  y/^ 

Tece  Wages  System.  Strikes  and  the  Right  to  Strike  .  .  2S 1-297  i^ 
Section  1.  Introductory.  Character  of  the  questions  in  this 
book:  they  involve  the  weighing  of  conflicting  elements,  and  are 
affected  by  social  sympathy,  281  —  Sec.  2.  The  wages  system 
necessarily  involves  restrictions  on  the  individual's  freedom,  283  — 
Sec.  3.  It  has  material  drawbacks  and  spiritual  drawbacks,  yet 
brings  a  net  balance  of  gain,  284  —  Sec.  4.  A  strike  is  not  a  mere 
cessation  of  work,  but  a  fighting  move.  It  is  the  set-off  against  the 
power  of  discharge,  287  — ■  Sec.  5.  Should  ths  right  to  strike 
be  restricted?  290  —  Sec.  6.  Employee  representation:  its  possi- 
bilities and  its  limitations,  295. 


CHAPTER  57 

Labor  Unions      .         .  298-317 

Section  1.  Bargaining  power  of  laborers  strengthened  by  unions. 
Weakness  of  the  single  laborer.  Immobility  of  labor;  lack  of  re- 
serve funds;  perishabihty,  298  —  Sec.  2.  Monopolistic  tendencies 
of  trade  unions  of  skilled  workers;  not  often  of  permanent  impor- 
tance. The  open  union,  such  as  alone  can  develop  among  the  less 
skilled,  a  potent  instrument  for  good,  301  —  Sec.  3.  Closed  shop 
or  open  shop?  A  strong  prima  facie  case  for  the  closed  shop  with 
the  open  union,  304  —  Sec.  4.  The  danger  of  a  check  to  progress 
and  efficiency  under  the  closed  shop.  Limitation  of  output;  piece 
work;  the  standard  rate;  labor-saving  appliances:  discipline,  306 
—  Sec.  5.  A  division  between  open  shop  and  closed  shop  not  unac- 
ceptable. Grounds  of  employers'  opposition  often  untenable.  The 
question  of  union  leadership  crucial,  310  —  Sec.  6.  The  scab  and 
the  use  of  violence.  The  tie-up,  313  —  Sec.  7.  The  unionist  move- 
ment Ukely  to  extend,  and  entitled  to  sjrmpathy,  315. 

CHAPTER  58 

Labor  Legislation  and  Labor  Hours  ....  318-334 

Section  1.  Labor  legislation,  like  labor  organization,  aims  to 
standardize  conditions  of  employment.  Legislation  on  the  hours 
of  labor  for  women  and  children  the  typica  case.  Other  sorts  of 
restriction.  Situation  in  the  United  States,  318  —  Sec.  2.  'Why 
legislation  must  supplement  and  support  the  laborers'  own  efforts. 


/ 


CONTENTS  xiii 

VOL.  II 
PAOE3 

A  great  moving  force  behind  it  is  the  gro\vth  of  altruism,  322  — 
Sec.  3.  Limitation  of  hou  's  for  men  comparatively  rare.  Are  there 
grounds  on  principle  for  confining  such  legislation  to  women  and 
children?  Constitutional  questions  in  tho  United  States,  324  — 
Sec.  4.  The  demand  for  an  eight-hour  day  deserves  support.  In- 
troduced suddenly  and  universally,  the  eight-hour  day  would  mean 
a  decline  in  produc  and  in  wages;  introduced  gradually,  and  jari 
■passu  with  improvements  in  production,  it  brings  unmixed  gain, 
326  —  Sec.  5.  Minimum  wages  introduce  no  new  principle,  but 
present  the  problem  how  to  deal  with  the  unemployable,  330. 


CHAPTER  59 

Some  Agencies  for  Industrial  Peace  .....  335-351 
Section  1.  Profit  sharing  affects  profits  as  the  residual  element. 
Some  modes  of  applying  it.  Immediate  and  deferred  participation, 
335  —  Sec.  2.  Profit  sharing  will  not  be  widely  apphed  unless  it 
pays,  by  increasing  efficiency.  Uncertain  connection  between 
profits  and  workmen's  efficiency.  Importance  of  the  employer's 
pensonalitj',  339 — -Sec.  3.  Other  methods  of  linking  employee  to 
employer:  "gainsharing"  and  "welfare"  arrangements,  342  —  Sec.  4. 
The  shding  scale  applicable  where  product  is  homogeneous.  Not 
in  harmonj'  with  the  general  principle  of  emploj^er's  assumption  of 
industrial  risks,  yet  often  helpful  toward  avoiding  friction  and  dis- 
pute, 343  —  Sec.  5.  Arbitration,  private  and  pubhc.  Not  appUca- 
ble  where  such  matters  as  recognition  of  the  imion  or  the  closed  shop 
are  in  dispute;  but  applicable  to  the  questions  of  wages  and  the  like. 
Private  boards  imply  trade  agreements  and  organized  unions. 
Public  boards  are  usually  boards  of  conciUation,  but  none  the  less 
helpful,  344  ^  Sec.  6.  Compulsory  arbitration,  carried  to  its  logical 
outcome,  means  settlement  of  all  distribution  by  public  authority, 
and  may  be  the  entering  wedge  to  socialism.  Possibihty  that  it  will 
remain  indefinitely  in  a  half-way  stage  and  not  proceed  to  this  out- 
come, 348. 

CHAPTER  60 

Workmen's  Insurance.  Poor  Laws  .....  352-371 
Section  1.  Irregularity  of  earnings  and  its  causes,  352  —  Sec.  2. 
Provision  against  accident  is  feasible  thru  insurance.  The  German 
system,  the  English,  the  French.  The  charges,  tho  levied  on  the 
employer,  are  likely  to  come  ultimately  out  of  wages,  353  —  Sec.  3. 
Insurance  against  sickness  no  less  feasible.  The  Friendly  Societies, 
the  German  system  of  compulsory  insurance.  The  possibility  of 
malingering  and  the  need  of  supervnsion,  3.57  —  Sec.  4.    Old-age 


XIV  CONTENTS 

pensions  in  European  countries  and  in  Australia.  Are  they  deter- 
rents to  thrift?  The  pecuniary  difficulties  not  insuperable,  359  — 
Sec.  5.  The  situation  in  the  United  States  as  to  accidents  long 
chaotic;  the  need  of  reform.  Rapid  spread  of  compensation  for 
accident.  The  political  difficulties  in  the  way  of  this  reform  and 
others,  362  —  Sec.  6.  Unemployment,  tho  it  tends  to  correct 
itself,  is  a  continuing  phenomenon.  Difficulties  of  applying  any 
method  of  insurance.  Possibility  of  supplementing  trade-union 
out-of-work  benefits.  The  British  National  Insurance  Act  of  1911. 
Relief  works,  364  — ■  Sec.  7.  Poor  laws:  the  conflict  between  sym- 
pathy and  caution.  Relief  may  be  liberal  where  no  danger  of  de- 
moralization exists.  For  the  able-bodied,  it  needs  to  be  adminis- 
tered with  the  utmost  caution,  369 


CHAPTER  61 

Cooperation 372-384 

Section  1.  Cooperation  attempts  to  dispense  with  the  business 
man.  Its  various  forms,  372  —  Sec.  2.  Cooperation  in  retail  trad- 
ing, when  done  by  the  well-to-do,  of  no  social  significance.  When 
done  by  workingmen,  as  in  Great  Britain,  it  has  larger  effects. 
Methods  of  the  workingmen 's  stores  and  causes  of  their  success. 
The  movement  elsewhere,  373  —  Sec.  3.  Credit  cooperation  in 
Germany;  its  methods  and  results.  Other  sorts  of  societies,  and 
development  in  other  countries,  378  —  Sec.  4.  Cooperation  in 
production  would  most  affect  the  social  structure,  but  has  had  the 
least  development.  Causes  of  failure;  the  rarity  of  the  business 
qualities  and  the  limitations  of  workingmen.  The  future  of  cooper- 
ation, 381. 

References  on  Book  VI      .......        .      385 


BOOK  VII 
PROBLEMS  OF  ECONOMIC  ORGANIZATION 

CHAPTER  62 

Railways 389^06 

Section  1.  Railways  an  instrument  for  furthering  the  geo- 
graphical division  of  labor.  Corollary  from  this  that  they  are  not 
to  the  public  interest  imless  they  pay,  389  —  Sec.  2.  Economic 
characteristics  of  railways;  first,  the  great  plant.  Consequent 
tendency  to  decreasing  cost.    Hence  also  frequent  transition  from 


CONTENTS  XV 

VOL.  II 
PAGES 

financial  failure  to  financial  success,  392  —  Sec.  3.  The  element  of 
joint  cost,  both  as  to  fixed  charges  and  operating  expenses.  Charg- 
ing what  the  traffic  will  bear;  classification  of  freight,  395  —  Sec. 
4.  Justification  of  charging  what  the  traffic  wUl  bear  lies  in  full 
utilization  of  the  railway  equipment,  397  —  Sec.  5.  Other  conse- 
quences of  joint  cost:  flexibility  of  rates,  and  difficulty  of  deciding 
what  is  a  reasonable  rate,  399  —  Sec.  6.  Chaotic  rates  in  the  United 
States,  and  concession  to  favored  shippers,  partly  corrupt,  partly 
the  result  of  competition,  400  —  Sec.  7.  "Rebates"  and  the 
grounds  for  prohibiting  them.  Rate  agreements  and  pools  as  aids 
in  preventing  discriminations.  Inconsistency  of  our  legislation  on 
rebates  and  rate  agreements,  402  —  Sec.  8.  In  an  industrially  solidi- 
fied and  thickly  populated  country  the  principle  of  joint  cost  be- 
comes less  important  in  determining  railway  rates :  monopoly  posi- 
tion of  railroads  more  important,  404. 


CHAPTER  63 
Railway  Problems,  continued         ......         407-418 

Section  1.  Effects  of  railways  on  distribution.  An  unearned  in- 
crement analogous  to  rising  rent  of  land,  407  —  Sec.  2.  Tendency 
toward  concentration  of  ownership;  how  promoted  by  American 
methods  of  corporate  organization.  Overcapitalization  and  its  con- 
sequences, 409  —  Sec.  3.  Stock  speculation,  stimulated  by  over- 
capitalization, has  faciHtated  acquisition  of  control  by  the  "great 
operators,"  412  —  Sec.  4.   "Inside  management"  and  its  evils,  414 

—  Sec.  5.  What  benefits  have  come  from  private  ownership  in  the 
United  States,  and  how  far  railway  fortunes  have  been  earned,  415 

—  Sec.  6.   Increasing  tendency  to  monopoly,  and  need  of  public 
control  over  rates,  417. 


CHAPTER  64 
Public  Ownership  and  Public  Control        ....        419-440 

Section  1.  What  are  "pubUc  service"  industries?  The  legal  con- 
ception less  important  than  the  economic;  the  essential  earmark 
is  monopoly,  419  —  Sec.  2.  The  spur  of  profit  necessary  for  im- 
provements in  the  arts;  hence  a  preliminary  stage  of  private 
ownership  is  inevitable,  423  —  Sec.  3.  The  question  of  vested  rights 
when  public  ownership  displaces  private.  "Franchises"  should 
always  be  for  limited  terms.  Purchase  at  market  value,  425  —  Sec. 
4.  Are  there  criteria  marking  some  industries  as  suitable  for  public 
management?    The  tests  suggested  by  Jevons;  distrust  of  public 


xvi  CONTENTS 

VOL.   II 
PAGE3 

officials  underlies  them  all,  427  —  Sec.  5.  To  secure  trustworthy 
and  eJBcient  public  officials  is  partly  a  problem  of  political  machin- 
ery. Some  difficulties  of  public  management,  as  regards  the  em- 
ployment of  labor  and  the  maintenance  of  progress,  429  —  Sec.  6. 
The  fundamental  requisite  in  a  democracy  is  a  generally  high  level 
of  character  and  intelligence.  In  what  way  corruption  is  connected 
with  monopoly  industries,  431  —  Sec.  7.  The  future  of  democracy 
depends  on  its  success  in  dealing  with  these  industries.  Experiments 
in  ownership  to  be  welcomed,  especially  in  municipalities.  The 
prejudices  of  the  business  class  on  this  matter,  433  —  Sec.  8.  Pub- 
lic regulation  the  only  alternative  to  public  ownership.  The  two 
types  of  regulating  boards.  The  essential  object  is  to  limit  prices 
and  profits.  The  elevation  of  the  standards  of  private  manage- 
ment, 435  —  Sec.  9.  The  Transportation  Act  of  1920.  Provisions 
on  valuation  and  on  rates.  A  half-way  step  toward  public  owner- 
ship, which  is  likely  to  come  in  the  end,  437. 


CHAPTER  65 

Combinations  and  Trusts    .......         441-463 

Section  1.  Combinations  in  restraint  of  trade  and  the  common 
law  rule  making  them  void.  Surprising  effectiveness  of  this  rule, 
441  —  Sec.  2.  Modern  forms  of  combination  in  the  United  States: 
the  "trust,"  the  holding  company,  the  unified  corporation.  The 
Kartell  in  Germany.  The  fact  of  monopoly,  not  the  form  of  combi- 
nation, the  important  thing,  443  —  Sec.  3.  The  permanency  of 
combination  as  affected  (1)  by  the  economies  of  large-scale  manage- 
ment; (2)  the  devices  of  "unfair"  competition  —  railway  favors, 
discriminations  in  prices,  factor's  agreements,  advertising  devices. 
The  effective  defense  against  "unfair"  competition  is  not  from  leg- 
islation so  much  as  from  large-scale  competition,  447  —  Sec.  4.  Will 
large-scale  competition  persist?  The  pressure  from  constant  ac- 
cumulation of  fresh  capital.  Potential  competition,  and  the  pos- 
sible emergence  of  far-sighted  management  tinctured  by  a  sense  of 
public  responsibility,  452  —  Sec.  5.  The  possible  public  advan- 
tages of  combination  lie  in  the  mitigation  of  industrial  fluctuations. 
The  supposed  ruinous  effect  of  competition  to  be  judged  from  this 
point  of  view,  455  — •  Sec.  6.  The  legislative  problems.  Federal  regu- 
lation called  for  on  publicity,  capitalization,  eventually  perhaps  on 
profits  and  prices,  458  —  Sec.  7.  The  earmarks  of  monopoly:  size, 
profits,  discriminating  prices,  460  —  Sec.  8.  Legislation  in  the 
United  States.  The  act  of  1890  and  its  enforcement.  The  acts  of 
1914.  The  Federal  Trade  Commission,  461  —  Sec.  9.  Economic 
problems  have  outrun  poHtical  capacity  for  deahng  with  them,  463. 


CONTENTS  xvu 

CHAPTER  66 

464-483 
Socialism     .■•■•■ 

Section  1.  Proposals  for  large-scale  socialism  have  superseded 
those  for  isolated  communism.  The  essence  of  socialism  is  economic 
transformation:  changes  in  reUgion,  the  family  pohtical  mstitu- 
tions,  are  not  essential  to  its  program.  Nor  is  violen  change  essen- 
tial 464 -Sec.  2.  Land  and  capital  to  be  in  public  hands;  not 
necessarily  public  property  in  every  instance.  The  peculiar  prob- 
lem as  to  agricultural  land.  Wages  to  be  the  on^j.  form  of  income^ 
Exchange  and  money  in  the  socialist  state,  467 -Sec  3.  Guild 
socialism;  under  large-scale  industry,  it  leaves  the  problems  essen- 
tially the  same,  470  -  Sec.  4.  Three  conceivable  principles  of  dis- 
tribution: need,  sacrifice,  efficiency,  474  -  Sec.  5.  How  far  public 
ownership,  as  adopted  in  present  society,  is  socialistic;  how  far 
labor  legislation  and  the  like  are  so,  478  -  Sec.  6.  Some  current 
objections  to  socialism  are  of  little  weight;  for  examp  e  that  the 
huge  organization  is  impracticable,  that  goods  could  not  be  valued 
that  capital  could  not  be  accumulated.  Would  freedom  disappear? 
480. 

CHAPTER  67 

.       ,  .         .         484-501 

Socialism,  continued      .         •         •■         •         • 

Section  1.    The  family  and  the  problem  of  population  under 
socialism     The   Malthusian  difficulty   a  real  one,  484  —  Sec.  2. 
Vigor  and  efficiency  among  the  rank  and  file.    The  absence  of  the 
power  of  discharge.     The  irksomeness  of  labor,   486  -  Sec    S. 
Leadership  and  the  ways  of  securing  it.    The  love  of  distinction; 
can  it  be  satisfied  by  the  laurel  wreath?    Mixture  o    higher  and 
lower  aspects  in  the  love  of  distinction.    The  possible  growth  of 
altruism  488  —  Sec.  4.  The  selection  of  leaders  m  a  socialist  state. 
Genius  and  originality  likely  to  be  deadened  490  -  Sec.  5.   Mate- 
rial progress  thru  the  improvement  of  capital  hkely  to  be  checked. 
Is  a  change  in  distribution  alone  now  needed;  can  advance  in  pro- 
duction be  neglected?  492  -  Sec.  6.  The  problem  is  essentially  one 
of  motive  and  character.    Human  nature  and  ideals  of  emulation 
and  distinction  are  subject  to  change.    Tho  socialism  and  current 
movements  of  reform  rest  on  the  same  force,  the  difference  m  degree 
is  vast   493  —  Sec   7.    Is  socialism  to  be  the  ultimate  outcome  ot 
social  evolution?    The  materialistic  interpretation  of  history  and 
its  prophecies.    The  certainty  that  change  will  be  gradual  and  the 
impossibility  of  foreseeing  how  far  it  will  finally  go,  497. 

,,TT  .         501-502 

References  on  Book  Vli 


xviii  CONTENTS 

BOOK  VIII 
TAXATION 

CHAPTER  68  vol.  n 

PAGES  y 

Pkinciples  Underlying  Taxation 505-518  l/^ 

Section  1.  The  essential  nature  of  taxation:  no  quid  pro  quo. 
Taxes  a  sign  of  wider  consciousness  of  common  interest,  505  — 
Sec.  2.  Proportional  or  progressive  taxation?  This  question  of  jus- 
tice inextricably  connected  with  the  general  question  of  social 
justice  and  the  righteousness  of  inequalities  in  wealth.  "Ability" 
and  "equality  of  sacrifice"  are  inconclusive  principles,  507  — 
Sec.  3.  Should  property  incomes  be  taxed  at  higher  rates  than  those 
from  labor?  512  —  Sec.  4.  Can  taxes  be  made  higher  according  to 
the  source  or  nature  of  the  income?  513  —  Sec.  5.  Progressive  taxa- 
tion of  interest  from  capital,  on  the  principle  of  taxing  saver's  rent, 
516. 

CHAPTER  69  . 

Income  and  Inheritance  Taxes    ......        519-538      "^ 

Section  1.  Income  taxes  present  the  problem  of  progression 
sharply,  yet  should  be  considered  in  connection  with  other  taxes, 
519  —  Sec.  2.  Income  taxes  limited  as  a  rule  to  the  well-to-do 
classes.  The  exemption  of  small  incomes  rests  partly  on  social 
grounds,  partly  on  administrative  expediency,  520  —  Sec.  3.  The 
British  income  tax  and  the  device  of  stoppage  at  the  source.  The 
system  not  consistent  with  progression;  it  has  undergone  steady 
modification,  522  —  Sec.  4.  Progressive  taxation  on  the  entire 
income.  Declaration  necessary.  Conditions  for  the  effective  ad- 
ministration of  such  a  tax.  Income  taxes  peculiarly  adapted  for 
readjustment  from  year  to  year  to  fit  fiscal  needs,  527  —  Sec.  5. 
The  income  tax  question  in  the  United  States.  The  system  devel- 
oped since  the  Constitutional  amendment  of  1913,  529  —  Sec.  6. 
Inheritance  taxes  are  comparatively  easy  of  enforcement  and  lend 
themselves  easily  to  progression.  The  trend  toward  progression, 
532  —  Sec.  7.  A  high  rate  of  progression  in  inheritance  taxation 
would  check  accumulation.  If  appUed  new  ways  of  ensuring  the 
supply  of  capital  must  be  found,  535. 

CHAPTER  70 

Taxes  on  Land  and  Buildings 539-551 

Section  1.  Taxes  on  land  {e.g.  an  urban  site)  rest  definitively  on 
the  owner,  and  operate  to  lessen  economic  rent  by  so  much,  539  — 
Sec.  2.  Taxes  on  buildings  tend  to  be  shifted  to  the  occupier.  Qual- 


CONTENTS  xix 


ifications  and  limitations  of  this  proposition,  542  ■ —  Sec.  3.  Effects 
of  taxes  on  real  property  —  land  and  buildings  combined,  544  — 
Sec.  4.  In  the  long  run,  it  makes  no  difference  in  the  incidence  of 
such  taxes  whether  they  are  first  imposed  on  owner  or  tenant;  but 
for  short  periods  it  does.  Similarly,  it  is  in  the  main  of  no  concern 
whether  the  assessment  be  on  rental  or  on  capital  value;  tho  in 
some  respects  the  two  methods  bring  different  results,  546  — 
Sec.  5.  Concealed  taxation  of  workingmen  thru  taxes  on  their  dwell- 
ings, 548  —  Sec.  6.  Taxes  on  real  property  should  be  primarily 
local  taxes,  549, 

CPAPTER  71 

Taxes  on  Commodities 552-562 

Section  1.  Direct  and  indirect  taxes.  Various  ways  in  which 
"indirect"  taxes  are  levied  on  commodities,  552  —  Sec.  2.  In  the 
simplest  case,  of  a  competitive  commodity  produced  under  constant 
returns,  a  tax  tends  to  be  shifted  to  consumers.  Explanation  and 
qualification  of  this  principle,  553  —  Sec.  3.  Complexities  where  the 
commodity  is  produced  imder  increasing  or  diminishing  returns; 
where  there  is  monopoly.  Cautions  to  be  observed  in  the  appUca- 
tion  of  theoretic  reasoning  on  these  topics,  555  —  Sec.  4.  Taxes 
on  imports  present  no  peculiarities,  except  as  they  bring  a  rival  un- 
taxed supply  and  thus  raise  the  questions  concerning  protection,  558 
—  Sec.  5.  Taxes  on  commodities  are  httle  noticed  by  consumers. 
They  are  commonly  on  articles  of  large  consumption,  and  regressive 
in  their  effects.  A  large  and  varied  list  of  articles  is  most  easUy 
reached  by  customs  duties,  559. 

References  on  Book  VIII 562 


BOOK  V 
THE  DISTRIBUTION   OF  WEALTH 


CHAPTER  38 

Interest  on  Capital  used  in  Production.    The  Conditions 

OF  Demand 

Section  1.  What  is  meant  by  distribution.  The  meaning  of  the  term  "cap- 
ital," 3  —  Sec.  2.  There  is  no  such  thing  as  capital  distinct  from 
capital  goods,  6  —  Sec.  3.  The  essential  problem  as  to  interest. 
Money  is  not  the  cause  of  interest,  nor  does  its  quantity  affect  the  rate  of 
interest,  7.  —  Sec.  4.  Why  there  is  a  demand  for  present  means;  the 
effectiveness  of  the  time-using  processes  of  production.  Is  capital  pro- 
ductive? 9  —  Sec.  5.  How  the  marginal  effectiveness  or  productivity 
of  capital  determines  the  rate  of  return.  A  consumer's  surplus  arises 
from  the  more  effective  appHcations.  Analogy  to  the  problems  of  value 
and  utihty,  11  —  Sec.  6.  Is  there  a  general  tendency  to  diminishing 
returns  from  successive  doses  of  capital?  14  —  Sec.  7.  Human  direc- 
tion indispensable  to  successful  operation  of  the  capitahstic  process.  The 
human  factor  often  neglected  in  reasoning  on  this  subject,  18. 

§  1.  The  word  "distribution,"  in  the  sense  commonly  attached  to 
it  in  economic  writings,  refers  to  the  apportionment  of  the  in- 
come  of  a  community  among  its  several  classes  and  members.^ 
^^^lereve^  industrial ~3evelopment  is^"  in  any  degree"ad\^1nced^ 
there  are  owners  of  capital  and  of  land;  there  are  persons  using 
land  and  capital  who  yet  are  not  the  owners  —  tenants  and  bor- 
rowers; there  are  all  sorts  of  workers,  ranging  in  earnings  and  in 
social  position  from  the  poorly  paid  day  laborer  to  the  prosperous 
professional  man  and  salaried  manager.  A\Tiat  share  goes  to  a 
person  who  simply  possesses  capital  or  land,  and  what  share  goes 
to  an  individual  for  his  labor,  of  whatever  sort  —  these  are 
among  the  central  problems  of  distribution.  A  common  division 
of  the  subject  is  into  four  heads,  corresponding  to  four  groups  in 
the  communit}'  whose  income  is  supposed  to  be  governed  by  dif- 

^  The  word  obviously  is  used  in  quite  a  different  sense  when  we  speak  of  the 
"distribution"  of  commodities  thru  wholesale  and  retail  dealers  until  they  reach 
the  hands  of  consumers  —  the  more  common  meaning  in  business  parlance. 

3 


4  THE  DISTRIBUTION  OF  WEALTH  [38-5  1 

ferent  causes:  capitalists,  landowners,  laborers,  and  finally,  buSi- 
ness  mentor  .acti ve  managers  of  industrial  affairs.  The  capitalists 
are  said  to  receive  interest,  the  landowners  rent,  the  laborers 
wages,  and  the  business  men  profits  or  earnings  of  management. 
We  need  not  at  present  consider  how  far  this  classification  is  sat- 
isfactory; it  suffices  to  indicate  the  nature  of  the  new  subject  on 
which  we  now  enter. 

Neither  is  it  necessary  to  explain  in  advance  why  one  or  an- 
other of  these  subjects  should  be  selected  for  first  consideration. 
They  are  closely  connected,  and  no  full  understanding  of  any  one 
can  be  had  until  the  others  also  have  been  examined.  We  shall 
begin  by  considering  interest  —  that  share  which  goes  to  the 
owner  of  capital. 

It  has  already  been  explained  *  that  capital  results  from  saving 
and  investment.  It  has  been  explained,  too,  that  investment  is 
closely  connected  with  the  successive  division  of  labor  —  with 
the  series  of  stages  thru  which  production  proceeds  and  with  the 
factor  of  time  in  the  organization  of  production.  It  has  been  in- 
timated, further,  that  the  special  form  which  investment  takes  in 
modern  communities  —  the  hiring  of  laborers  by  a  separate  body 
of  capitalists  —  is  a  consequence,  and  indeed  perhaps  the  most 
important  single  consequence,  of  existing  inequality  in  the  distri- 
bution of  wealth.  All  these  propositions  bear  on  the  reasoning 
which  follows  on  the  subject  of  capital  and  interest,  and  in  turn 
are  illustrated  and  further  explained  by  what  follows. 

First,  what  do  we  mean  by  the  "capital"  on  which  interest  is 
obtained?  It  is  best  to  begin  by  still  using  the  term  in  the  sense 
of  producers'  capital  —  concrete  tools  made  by  man  and  used 
for  the  production  of  consumers'  goods.  Such  are  factories,  ware- 
houses, raw  materials  and  goods  in  dealers'  hands,  railways  and 
steamships,  agricultural  implements.  For  the  present  we  shall 
set  aside  consumers'  wealth,  such  as  dwellings  and  household  fur- 
niture. Land  and  like  agents  provided  by  nature  without  appli- 
cation of  labor  may  also  be  excluded  from  the  discussion  of  capi- 
tal.   In  order  to  break  up  the  complex  problem  into  its  several 

'  See  Chapter  5,  §§  4r-6. 


38-§l]  CAPITAL  USED  IN  PRODUCTION  5 

parts,  we  shall  proceed  piece  by  piece.  Producers'  capital,  or  pro- 
ducers' goods,  are  what  we  shall  begin  with. 

Some  distinctions  and  some  questions  of  terminology  call  for 
further  preliminary  consideration. 

An  individual  usually  thinks  so  much  of  his  property  to 
be  capital  as  yields  him  an  income;  but  there  i^  an  obvious 
distinction  between  that  which  is  capital  for  the  community 
and  that  which,  in  this  usual  sense,  is  "capital"  to  the  indi- 
vidual. 

Stocks,  bonds,  and  securities  yield  an  income  to  the  owner,  and 
are  regarded  by  him  as  part  of  his  capital.  In  themselves  these 
are  simply  evidences  of  ownership  or  of  indebtedness.  A  stock 
certificate  states  that  the  holder  has  certain  fractions  of  owner- 
ship in  a  given  concrete  thing  or  set  of  things.  A  bond  is  a  mere 
promise  to  pay.  Bonds  are  commonly  issued  as  the  result  of  op- 
erations of  saving  and  investingjyliich  have  to  do  with  the  mak- 
ing of  capital.  But,  as  in  the  case  of  government  borrowing  for 
war  expenditure,  they  may  be  the  result  of  operations  which  are 
quite  wasteful.  Tho  capital  to  the  individual,  they  may  or  may 
not  signify  the  creation  or  the  existence  of  real  capital. 

Consumer's  wealth  is  not  commonly  regarded  by  an  individual 
as  part  of  his  capital.  A  factory;  a  stock  of  materials  or  goods 
used  in  business  operations;  money  on  hand  or  in  bank,  not  in  the 
nature  of  spare  cash  for  current  expenses,  but  a  fund  or  reserve 
for  business  purposes  —  such  things  he  thinks  of  as  capital. 
Household  furniture,  clothing,  horses  and  carriages,  he  does  not 
so  reckon,  since  these  yield  him  no  income.  Possibly  a  dwelling, 
tho  occupied  by  the  owner  and  yielding  no  direct  income,  would 
still  be  regarded  by  him  as  part  of  his  capital;  for  he  might  re- 
flect that,  if  he  did  not  own  it,  he  would  have  to  hire  one  at  a 
rental,  and  hence  might  conclude  that  his  own  was  equivalent  to 
income-yielding  property.  Dwellings  not  occupied  by  the  owner, 
but  let  to  tenants,  would  unquestionably  be  regarded  as  capital. 

The  term  "capital,"  like  others  imported  from  everyday  speech, 
constantly  used  in  economics  —  such  as  profits,  wages,  rent, 
money,    taxes  —  has    varying    connotations    and    associations, 


6  THE  DISTRIBUTION  OF  WEALTH  [38- §  2 

Every  person  who  writes  or  thinks  on  economics  will  find  himself 
attaching  to  any  one  of  these  words  sometimes  the  meaning  which 
it  has  in  ordinary  usage,  or  one  of  the  meanings,  and  sometimes 
the  more  exact  sense  which  he  has  assigned  to  it  for  the  purposes 
of  rigorous  analysis.  Usually  the  context  of  a  given  passage  will 
show  in  what  way  it  is  used.  -Ja.  .spgaking  of  the  capital  of  a 
bank,  for  example,  we  mean  obviously  the  capital  reckoned  in'" 
terms  of  money;  and  so  in  speaking  of  the  capital  and  surplus,  the 
income  account  and  capital  account,  of  a  business  or  corporation. 
Sometimes,  it  is  true,  ambiguity  still  slips  in;  the  most  careful 
writer  may  be  tripped  up  in  his  exposition  and  even  in  his  own 
thinking  by  the  absence  of  an  accepted  scientific  terminology. 
In  the  following  pages  and  in  general  thruout  this  book,  the  en- 
deavor is  made  to  denote  by  "capital"  the  concrete  things  or 
capital  goods  which  constitute  the  material  equipment  of  the 
community.  We  shall  have  in  mind  real  things,  not  rights  to 
things;  and  we  shall  have  in  mind  producers'  capital  —  those 
goods  which  make  up  the  apparatus  of  production. 

§2.  Some  writers  have  distinguished  between  "capital"  and 
"capital  goods."  By  the  latter  term  they  mean  the  concrete  ap- 
paratus of  production  —  just  that  to  which,  in  the  present  dis- 
cussion, the  single  word  "capital"  is  affixed.  But  by  the  word 
"capital"  alone  these  writers  mean  the  value  of  the  concrete  ap- 
paratus; and  they  sometimes  speak  as  if  there  were  a  sort  of  dis- 
tillation or  essence  of  capital,  distinct  from  the  tangible  capital 
goods  in  which  it  is  embodied. 

It  is  often  convenient  to  measure  and  record  capital  in  terms  of 
value  and  price  —  as  so  much  money.  In  that  way  alone  can  the 
various  constituent  elements  be  reduced  to  a  common  denomi- 
nator. An  individual  usually  states  his  capital  as  being  so  much 
in  money  value.  His  capital  obviously  consists,  not  of  the  stated 
sum  of  money,  but  of  factories,  machines,  buildings,  merchandise, 
stocks  and  bonds,  if  you  please  —  the  various  things  which  make 
up  an  individual's  "  capital."  He  simply  measures  it  in  terms  of 
the  price  for  which  the  whole  would  sell.  Similarly,  we  can 
reckon  the  community's  capital  in  terms  of  the  price  for  which 


38-§3]  CAPITAL  USED  IN  PRODUCTION  7 

the  whole  would  sell.  If  the  total  prices,  at  current  rates,  of  the 
various  factories,  railways,  ships,  machinery,  tools,  materials, 
goods  in  stock,  were  added  together,  the  sum  would  give  an  idea  of 
how  much  capital  the  community  possesses.  It  would  give  a 
very  imperfect  idea.  Statistics  of  this  sort,  occasionally  collected 
by  public  officials  for  census  purposes,  are  in  many  ways  mis- 
leading. Yet  if  we  wish  to  measure  total  capital  or  total  wealth 
at  all,  we  can  proceed  only  in  this  unsatisfactory  way.  Tho  some 
forms  of  capital  can  be  measured  in  other  terms  —  machinery, 
for  example,  in  terms  of  horse-power,  or  textile  mills  in  terms  of 
spindles  and  looms  —  the  only  measurable  element  common  to.--^ 
all  forms  is  thaTthey^Eave  value^and^riceT^and  the  only  way  of 
reaching  a  quantitative  statement  as  to  the  whole  is  in  terms  of 
value  and  price.  But  it  is  not  to  be  supposed  that  there  is  any 
such  thing  as  capital  distinct  from  the  capital  goods.  .  The  only 
actual  and  existent  thing  is  the  concrete  apparatus  of  production. 
Its  value  or  price  is  merely  a  relation  to  other  things,  a  mode  of 
measuring  it, 

§3.  Having  disposed  of  these  questions  of  terminology,  we 
may  proceed  to  the  substance  of  the  matter  in  hand. 

The  essential  problem  concerning  interest  can  be  stated  in 
simple  terms.  Why  should  an  individual  who  borrows  from  an- 
other a  given  quantity  of  commodities  —  represented,  in  any 
except  primitive  communities,  by  a  given  quantity  of  money  — 
engage  to  return,  after  a  fixed  time  has  elapsed,  not  only  what  he 
has  borrowed  but  something  in  addition?  That  the  amount  bor- 
rowed should  be  returned,  seems  sufficiently  easy  of  explanation. 
But  why  can  the  lender  get  the  premium  also?  That  premium, 
as  is  familiar  enough,  usually  is  expressed  in  terms  of  a  percentage 
paid  each  year.  The  borrower  engages  to  pay  back  not  only  the 
principal,  but  five  per  cent  or  thereabouts  in  addition  for  each 
year  that  elapses,  and  a  proportional  percentage  for  each  fraction 
of  a  year.  To  ascertain  why  this  additional  percentage  is  paid, 
is  to  solve  the  problem  of  interest. 

The  fact  that  the  transaction  in  modern  communities  takes  the 
form  of  a  loan  of  money  and  a  repayment  of  money  with  inter- 


8  THE  DISTRIBUTION  OF  WEALTH  [38-§3 

est,  has  often  led  to  the  notion  that  it  is  pecuHarly  connected 
with  money  and  arises  from  the  nature  and  functions  of  money. 
Usually  this  notion  takes  the  form  of  reasoning  in  a  circle.  People 
are  familiar  with  the  everyday  practise  of  lending  at  interest; 
they  say  that  money  is  "worth"  so  much,  meaning  that  it  can  be 
lent  at  some  annual  rate;  and  they  argue  that  the  borrower  must 
pay  this  rate  in  order  to  get  the  money.  What  more  simple?  Or 
they  say  vaguely,  with  Shylock,  that  money  "breeds"  interest; 
which  again  is  a  statement  of  the  problem,  no  solution.  A  little 
reflection  shows  that,  here  as  elsewhere,  money  serves  simply  as 
the  medium  of  exchaiige.  What  the  borrower  wants  is  not  the 
money  itself,  but  that  command  over  commodities  and  services 
which  money  gives.  He  wishes  to  buy  commodities,  either  for 
his  own  immediate  use  or  for  use  in  operations  of  production ;  and 
in  the  latter  case  (the  one  to  which  the  present  discussion  is  more 
immediately  directed)  he  wishes  to  procure  machines,  materials, 
and  the  means  for  paying  laborers  whom  he  hires.  And  when  he 
returns  the  money,  plus  the  premium,  he  gives  back  to  the  lender 
the  same  command  over  commodities  which  he  had  received,  and 
something  in  addition;  he  gives  back  more  commodities  than  had 
been  lent  him.  If  there  were  no  such  thing  as  money,  the  same 
sort  of  transactions  would  take  place;  precisely  as,  given  the  divi- 
sion of  labor,  the  exchange  of  different  sorts  of  commodities  would 
take  place  under  barter  in  fundamentally  the  same  way  as  with 
the  use  of  a  medium  of  exchange.  Under  barter  both  transac- 
tions obviously  would  be  managed  with  much  greater  diflBculty. 
The  medium  of  exchange  makes  borrowing  easier,  as  it  makes  ex- 
change easier;  and  it  makes  possible  much  borrowing  and  much 
exchanging  which  otherwise  would  be  impracticable.  The  ex- 
planation, however,  of  both  sets  of  phenomena  is  not  to  be  found 
in  the  use  of  money,  but  in  the  nature  of  the  operations  which  it 
facilitates. 

We  may  brush  aside  not  only  the  notion  that  interest  arises 
from  the  use  of  money,  but  that  the  rate  of  interest  depends  on 
the  quantity  of  money.  More  money  makes  higher  prices,  not 
lower  interest.     The  connection  which  does  exist  between  the 


38-§4]  CAPITAL  USED  IN   PRODUCTION  9 

rate  of  bank  discount  and  the  quantity  of  money  held  by  banks 
has  been  sufficiently  explained.^  This  bank  rate  oscillates  abo\'e 
and  below  what  may  be  called  the  true  rate  of  interest  —  the  re- 
turn on  steady  investments.  In  the  exposition  which  follows,  this 
essential  rate  of  interest  will  be  had  in  mind. 

§4.  Interest,  then,  appears  as  the  result  of  an  act  of  exchange 
by  which  a  quantity  of  money  (or  commodities)  now  in  hand,  is 
given  for  a  greater  quantity  of  money  (or  commodities)  to  be  re- 
turned in  the  future.  The  excess  or  surplus  thus  emerging  seems 
to  be  got  for  nothing;  there  is  no  obvious  equivalent  for  the  pre- 
mium or  interest.  Yet  an  exchange  of  something  for  nothing 
going  on  year  after  year,  decade  after  decade,  century  after  cen- 
tury, is  not  to  be  expected.  Two  questions  present  themselves: 
on  the  one  hand,  why  is  the  borrower,  whom  we  may  regard 33 
the  purchaser,  willing  to  pay  this  excess;  on  the  other  hand,  why 
is  the  lender,  _  or  seller,^  able  to  secure  it  for  hirnself?  In  other 
words,  what  are  the  conditions  of  demand,  represented  by  the 
borrowers,  and  what  the  conditions  of  supply,  represented  by  the 
sellers?  These  we  shall  consider,  in  the  order  stated,  in  the  present 
and  the  following  chapter.  The  conditions  of  demand  we  shall 
analyze  first  with  reference  to  those  borrowers  who  are  engaged 
in  operations  of  production;  since  we  are  considering  first  the  case 
of  interest  derived  from  producers'  capital. 

Some  indication  of  the  conditions  of  demand  has  already  been 
given.  In  a  previous  chapter  2  the  nature  and  functions  of  capi- 
tal were  described.  It  was  pointed  out  that  the  use  of  capital 
means  production  spread  over  time.  Production  with  capital  has 
been  aptly  described,  in  Bohm-Bawerk's  phrase,  as  indirect  or 
roundabout  production.  Labor  is  first  applied  to  making  tools, 
collecting  materials,  perfecting  means  of  communication;  finally, 
at  the  close  of  preparatory  steps  which  may  be  long  and  arduous, 
the  enjoyable  product  emerges^and  emerges  .„m„,much  greater 
abundance  than  if  labor  had  been  applied  directly.  The  mine, 
the  railway,  the  steamship,  the  iron  works,  the  factory,  the  ware- 

>  Chapter  25,  especially  §  2. 
«See  Chapter  5,  §§1-3. 


10  THE  DISTRIBUTION  OF  WEALTH  [38-§4 

house,  the  wholesale  and  retail  store,  all  stand  for  a  prolonged 
and  time-requiring  process  of  production. 

Further,  production  in  the  advanced  communities  of  modern 
times  is  "capitalistic"  in  another  sense:  there  is  a  class,  separate 
in  the  main,  of  capitalists.  The  long-maintained  application  of 
labor  in  successive  steps  is  possible  only  if  at  the  outset  there  has 
been  a  surplus  —  if  there  has  been  saving  and  accumulation  in 
some  form.  The  persons  who  do  the  saving  and  possess  the  sur- 
plus are  commonly,  tho  not  necessarily,  a  different  set  from  those 
who  do  the  labor.  They  hire  the  laborers  in  the  various  stages  of 
the  productive  operations.  The  creation  of  capital  and  the  emer- 
gence of  interest  as  a  distinct  element  in  distribution  are  alike  the 
consequences  of  the  double  process  of  surpluses  saved  and  of  labor 
applied  in  roundabout  ways. 

We  have  now  to  note  more  explicitly  that  this  process  means 
an  increase  in  the  productiveness  of  labor.  The  great  modern 
flour  mill  is  more  efficient  than  the  modest  grist  mill  of  former 
times.  Per  unit  of  labor  applied,  more  is  accomplished.  To 
make  an  accurate  comparison  of  labor  product  between  two  such 
cases  would  call  for  intricate  computation.  On  the  one  hand,  the 
modern  mill  stands  for  much  more  of  preparatory  labor.  On  the 
other  hand,  it  is  usually  more  durable  and  the  labor  applied  to 
making  it  continues  to  play  its  part  thru  a  long  period,  until  the 
mill  is  finally  worn  out  and  discarded.  The  later  labor  in  the 
series  —  that  done  by  the  current  workers  in  the  modern  flour 
mill,  who  turn  out  their  thousands  of  barrels  a  day  —  seems 
much  more  effective  than  that  of  the  old-fashioned  miller,  because 
we  do  not  ordinarily  think  of  the  preliminary  labor  embodied  in 
the  plant  as  being  engaged  in  milling.  That  even  so  the  efficiency 
of  all  the  labor  engaged,  of  earlier  as  well  as  of  later  date,  is 
greater,  is  shown  by  the  simple  comparison  of  prices:  flour  is 
vastly  cheaper  (that  is,  the  excess  in  the  price  of  flour  over  that 
of  grain)  than  in  former  days.  So  in  the  railway:  there  has  been 
an  enormous  application  of  capital  —  that  is,  of  previous  labor  — 
with  an  outcome  of  transportation  rates  so  low  as  to  prove  that, 
taking  account  of  all  the  labor  of  construction,  maintenance,  and 


38-§5]  CAPITAL  USED  IN  PRODUCTION  11 

operation,  its  efficiency  is  immensely  greater  than  that  of  the  sim- 
pler instruments  of  pack  horse  and  wagon. 

This  consequence  has  sometimes  been  stated  by  saying  that 
capital  is  productive;  a  phrase  which  must  be  used  with  care. 
The  strictly  accurate  statement  is  that  labor  applied  in  some 
ways  is  more  productive  than  labor  applied  in  other  ways.  Tools 
and  machinery,  buildings  and  materials  are  themselves  made  by 
labor,  and  represent  an  internfediate~stage  m  the  application  of 
labor.  Capital  as  such  is  not  an  independent  factor  in  production, 
and  there  is  no  separate  produHTvene^s^of  capital.  "\^Tien,  in  the 
following  pages,  the  productivity  of  capital  is  spoken  of,  the  lan- 
guage must  be  taken  as  elliptic,  expressing  concisely  the  result  of 
the  capitalistic  application  of  labor. 

All  this  analysis  of  the  relation  of  labor  to  capital  and  to  sav- 
ings leads,  again,  to  the  proposition  that  all  the  operations  of 
capitalists  resolve  themselves  into  a  succession  of  advances  to 
laborers.^  Some  persons  have  a  surplus,  and  set  it  aside  for  in- 
vestment — ^^ey  arethe  capitalists  pure  and  simple.  Still  other 
persons  borrow  this  surplus  (very  likely  using  also  available  means 
of  their  own)  and  hire  laborers  to  make  tools  and  materials,  to 
carry  on  all  the  stages  of  production,  and  so  produce  in  the  end 
more  consumable  commodities  than  have  been  turned  over  to  the 
laborers.  The  laborers  as  a  whole  produce  more  than  they  receive. 
Those  who  borrow  and  then  hire  the  laborers  can  afford  to  pay 
back  more  than  the}^  have  borrowed.  This  is  the  process  by  which 
interest  on  capital  used  in  production  comes  into  existence. 

§  5.  Let  it  be  supposed  now  that  at  any  given  time  thecapilai- 
istic  ways  of  production  —  the  applications  of  tools,  machinery, 
materials,  and  the  like  —  have  been  so  settled  and  established  as 
to  become  familiar  to  all.  Let  it  be  supposed  also  that  they  are 
equally  available  for  all;  that  no  one  has  a  monopoly  of  any  par- 
ticular form;  that  all  who  wish  to  use  them  are  in  unfettered  com- 
petition with  each  other.  No  borrower,  in  getting  control  of  any 
particular  kind  of  capital,  will  then  be  able  to  secure  a  greater  ad- 
vantage than  any  other  from  the  use  of  savings.  Competition 
*  See  Chapter  6,  §5. 


12  THE  DISTRIBUTION  OF  WEALTH  l38-§5 

will  bring  the  return  in  all  channels  of  investment  to  the  same 
level.    What  will  determine  that  miiform  level  ? 

All  the  constituent  parts  of  capital,  tho  they  will  yield  the  same 
return  to  those  applying  them,  will  not  necessarily  affect  to  the 
same  degree  the  productiveness  of  labor.  Some  may  be,  and  al- 
most surely  will  be,  more  helpful  in  production  than  others. 
Imagine  that  a  community,  once  in  possession  of  a  stock  of  tools 
and  appliances,  were  compelled  to  part,  by  successive  steps,  with 
installments  of  this  capital.  Clearly  it  would  first  relinquish  those 
parts  which  contributed  least  to  the  productiveness  of  labor,  and 
then,  as  more  and  more  had  to  be  given  up,  would  relinquish 
others  in  the  inverse  order  of  serviceableness.  It  would  reserve 
to  the  very  last  those  constituents  of  capital  —  that  is,  those 
means  of  roundabout  production  —  which  added  most  to  the  out- 
put. These  means  —  the  last  to  be  given  up  under  existing  con- 
ditions, the  first  to  be  used  —  would  probably  be,  on  the  one 
hand,  such  as  were  essential  for  the  agricultural  processes  which, 
in  the  temperate  climate,  involve  seasonal  operations  —  seed 
and  farming  tools,  and  about  a  year's  surplus  of  food;  and,  on  the 
other  hand,  the  metallurgical  apparatus  which  yields  iron,  the 
prime  requisite  for  almost  all  tools.  These,  the  most  effective 
forms  of  capital,  have  not  necessarily  been  the  first  historically. 
The  progress  of  invention  may  have  brought  them  in  at  a  later 
date  than  others  of  less  serviceableness.  But  given  various  ap- 
pliances that  have  come  to  exist  side  by  side,  some  will  be  more 
effective  than  others,  and  in  case  of  inevitable  curtailment  would 
be  the  longest  retained. 

Under  these  conditions  the  gain,  or  premium,  or  interest,  which 
the  owners  of  capital  will  secure,  will  be  determined  by  the  least 
productive  use  of  capital;  or,  to  be  quite  accurate  in  language, 
by  the  addition  to  the  ultimate  product  of  labor  which  results 
from  the  least  effective  phase  of  the  roundabout  or  capital-using 
process.  Those  who  use  capital  in  ways  more  effective  than  the 
least  cannot  retain  the  superior  gain  for  themselves.  Since  all 
who  have  capital  at  command  can  turn  to  these  more  effective 
ways,  competition  will  prevent  any  one  set  of  persons  from  secur- 


38- §5]  CAPITAL  USED  IN  PRODUCTION  Ic- 

ing especially  high  gains  from  them.  It  is  the  efTectiveness  of  the 
last  installment  of  capital  (last  in  the  order  of  productiveness) 
that  determines  the  rate  of  gain  for  all  capital.  Or,  to  put  the 
same  proposition  in  other  words,  the  return  to  capital  depends  on 
its  marginal  productivity.  "Productiveness"  and  "productiv- 
ity" are  used,  to  repeat,  in  the  elliptic  sense  already  explained. 

It  may  be  asked,  Does  the  productiveness  or  serviceableness  of 
all  forms  of  capital  descend  to  that  of  the  marginal  forms?  An 
equalization  of  the  return  to  owners  of  capital  takes  place;  does 
an  equalization  of  productivity  also  take  place?  Not  necessarily. 
The  outcome  is  like  that  which  we  have  found,  when  discussing 
the  principles  of  value,  as  to  the  utility  and  the  price  of  the  several 
constituents  in  the  supply  of  an  enjoyable  commodity.*  Tho  all 
the  units  of  a  supply  sell  in  the  market  at  the  same  price,  not  all 
have  the  same  utility.  There  is  such  a  thing  as  consumer's  sur- 
plus. Similarly,  tho  the  return  to  the  owners  of  all  the  constitu- 
ents of  capital  is  under  free  competition  the  same,  the  contribu- 
tion from  all  the  constituents  to  the  community's  well-being  is 
not  the  same.  Some  remain  more  serviceable  than  others.  And 
the  difference  in  serviceableness  has  the  same  consequence  as  in 
the  case  of  the  utilities  from  enjoyable  goods  —  it  affects  con- 
sumer's surplus.  The  more,  effective  uses  of  capital  lead  in  espe- 
cial degree  to  greater  abundance  of  commodities,  to  another  pro- 
vision of  some  sorts  of  utilities,  and  so  to  wider  satisfaction  of 
wants  in  the  community  at  large. 

A  similar  principle  to  that  which  underlies  the  theory  of  value 
thus  underlies  the  theory  of  capital.  Marginal  vendibility  deter- 
mines the  current  value  of  commodities;  marginal  productivity 
determines  the  current  rate  of  interest.  There  are  utilities  in 
goods  (and  services)  greater  than  at  the  margin.  There  are  con- 
tributions from  different  forms  of  capital  greater  than  at  the  mar- 
gin. These  surpluses  the  individual  owner  cannot  keep;  the  com- 
munity at  large  enjoys  them  in  the  form  of  consumer's  surplus.^ 

^  See  Chapter  9,  especially  §§  3-6. 

^  Compare  the  pregnant  passage  in  Jevons,  Theory  of  Political  Economy,  p.  277. 
A  contrary  view  is  implied  in  Clark,  Distribution  of  Wealth,  Chapter  XXI. 


14  THE  DISTRIBUTION  OF  WEALTH  [38- §  6 

And  the  same  sort  of  difficulty  which  we  found  in  measuring  the 
consumer's  surplus  derived  from  goods  would  appear  if  we  en- 
deavored to  measure  the  same  sort  of  surplus  derived  from  some 
of  the  constituents  of  capital.  What  constituents  of  capital  would 
be  longest  retained  and  how  great  the  effectiveness  of  this  most 
precious  remnant  would  be,  we  cannot  possibly  gauge.  We  can 
only  rest  assured  that  differences  in  the  degree  of  productiveness 
there  are,  and  that  society  as  a  whole  profits  greatly  thru  secur- 
ing all  forms  of  its  capital  at  the  same  rate  that  it  pays  for  the 
least  advantageous  forms. 

§  6,  Some  of  the  most  acute  economists  of  our  day  ^  have 
stated  this  part  of  the  theory  of  capital  and  interest  in  different 
terms,  tho  with  a  conclusion  not  in  essentials  very  divergent. 
Briefly,  their  view  is  that  by  a  resort  to  more  and  more  capital- 
istic or  roundabout  ways  of  production,  the  output  per  unit  of 
labor  can  be  indefinitely  increased.  But  this  increase  does  not 
take  place  continuously  at  the  same  pace.  There  is  a  tendency  to 
diminishing  gain,  or  diminishing  return;  a  tendency  to  a  decline 
in  the  rate  of  increase  in  production.  Add  more  tools  and  appli- 
ances —  that  is,  do  more  and  more  labor  of  preparation,  make  your 
(total  process  of  production  more  prolonged  and  elaborate  —  and 
you  will  always  get  a  larger  final  output.  But  the  increase  in  the 
productiveness  of  labor,  great  in  the  first  stages  of  this  capital- 
istic way  of  applying  it,  becomes  less  in  the  later  stages.  There 
is  believed  to  be  no  limit  to  the  heightened  effectiveness  of  labor 
due  to  marshalling  it  over  time  and  elaborating  machinery  and 
materials  more  and  more.  The  obstacle  is  like  that  in  pulling  a 
stout  rubber  band:  it  can  always  be  stretched  a  bit  more,  but 
each  additional  application  of  force  means  a  lessened  effect. 

In  this  view,  it  will  be  seen,  differences  in  productivity  and 
marginal  productivity  appear  not  only  on  taking  a  cross-section 
of  industry  at  a  given  moment,  but  in  the  development  of  industry 
over  the  course  of  time.  The  tendency  to  a  diminishing  gain  in 
efficiency  may  indeed  be  counteracted  by  inventions  and  improve- 
ments. But  in  the  absence  of  such  progress,  the  marginal  increase 

*  For  example,  Professora  Bohm-Bawerk,  Clark,  and  Carver. 


38-§6]  CAPITAL  USED  IN  PRODUCTION  15 

of  gain  tends  to  sink,  and  so  also  the  rate  of  return  on  capital; 
and  it  sinks  gradually  and  with  some  degree  of  regularity. 

It  would  follow  as  a  corollary  that  the  application  of  capital 
can  be  increased  indefinitely  without  bringing  a  cessation  of  re- 
turn in  the  way  of  interest  to  the  owner  of  capital.  Additional 
installments  could  always  be  used  to  some  advantage;  there  would 
always  be  some  marginal  productivity.  Interest,  in  other  words, 
would  persist  indefinitely,  notwithstanding  the  utmost  growth  of 
accumulation.  Whereas  in  a  more  skeptical  view  the  indefinite 
increase  of  savings  and  of  capital  may  cause  the  point  of  satiety 
to  be  reached.  Unending  increase  in  the  means  for  applying 
preparatory  labor  may  bring  difficulty,  nay  impossibility,  in  using 
the  savings  to  advantage;  and  then,  so  far  as  the  forces  of  de- 
mand determine  interest,  it  will  be  brought  down  to  nil. 

Like  other  problems  bearing  on  the  distribution  of  wealth,  this 
must  be  confessed  to  be  unsettled.  To  enter  on  a  full  discussion 
of  the  trains  of  reasoning  involved,  would  pass  the  compass  of 
the  present  book.  I  will  present  concisely  my  reasons  for  hesi' 
tating  to  accept  a  general  principle  of  diminishing  returns  in  the 
applications  of  capital. 

The  increase  of  tools  and  instruments  may  be  supposed  to  take 
place  in  two  ways:  either  by  the  addition  of  more  tools  of  the 
sort  already  in  use,  or  by  the  addition  of  new  kinds  of  tools.  Mere 
duplication  of  familiar  tools  would  seem  to  promise  little  or  noth- 
ing in  the  way  of  greater  productiveness.  Twice  as  many  saws  or 
planes  for  each  carpenter,  twice  as  many  looms  for  each  weaver, 
twice  as  many  locomotives  for  each  engineer  —  such  a  proceed- 
ing does  not  mean  that  more  will  be  accomplished  by  the  carpen- 
ters and  weavers  and  engineers.  It  means  an  embarrassment  of 
riches.  Of  the  complicated  machinery  of  a  great  factory  this 
would  seem  to  be  true  also.  To  run  this  machinery,  a  certain 
staff  of  operatives  is  required,  adjusted  to  it  by  nice  experiment 
and  calculation.  Duplicate  the  whole  outfit,  and  there  will  be  no 
one  to  take  charge  of  it.  The  staff  can  utilize  no  more  than  is  al- 
ready on  hand. 

More  difficult  is  the  problem  as  to  the  second  way  in  which  the 


16  THE  DISTRIBUTION  OF  WEALTH  [38-§  6" 

additions  to  capital  may  be  supposed  to  take  place.  Here  it  is 
assumed  that  there  are  not  more  tools  of  the  same  kind,  but  tools 
of  a  more  elaborate  and  complex  kind.  With  greater  savings  and 
a  greater  possibility  of  applying  labor  in  advance,  capital  takes 
by  a  quasi-automatic  process  a  different  form :  not  two  saws,  but 
one  larger  and  better  saw;  not  two  locomotives,  but  one  heavier 
and  more  powerful.  The  mere  fact  of  greater  present  resources 
available  for  investment  causes  the  roundabout  operations  to  be 
extended,  the  time  of  the  whole  process  to  be  prolonged.  Plant 
becomes  larger,  machinery  more  complex  and  more  nearly  auto- 
matic, materials  are  heaped  up  in  more  varied  supply.  Then 
product  ultimately  becomes  greater;  but  in  the  rate  of  increase 
there  is  supposed  to  be  a  tendency  to  diminution.  ^ 

It  is  the  quasi-automatic  or  predictable  character  of  this  process 
of  elaboration  that  seems  to  me  doubtful.  The  more  "capital- 
istic" application  of  labor  does  not  necessarily  bring  an  increase 
in  efficiency.  Where  it  does  bring  such  an  increase,  the  more  pro- 
longed preparation  may  be  effective  at  the  same  rate  or  at  an  in- 
creasing rate  or  at  a  decreasing  rate.  Thej)utcome  depends  on  the 
progress  of  invention,  concerning  which  no  rule  can  be  laid  down.  _ 

It  is  true  that  during  the  period  since  the  Industrial  Revolu- 
tion, the  progress  of  the  arts  has  been  precisely  in  the  direction 
of  making  appliances  which  require  time  and  labor  and  which 
greatly  increase  the  eventual  productiveness  of  labor.  Nor  is 
there  any  indication  that  progress  of  this  kind  will  cease.  The 
history  of  the  last  few  generations,  and  the  prospects  for  the  next 
few,  support  the  proposition  that  the  increase  of  savings  and  of 
capital  has  brought  and  will  bring  greater  productiveness  of  labor. 
But  this  has  been  due  and  will  continue  to  be  due  to  a  host  of 
projectors  and  inventors,  to  a  succession  of  steps  each  one  of 
which  is  at  the  outset  more  or  less  doubtful.  How  great  such 
progress  will  be,  and  how  long  it  will  continue,  cannot  be  pre- 
dicted. The  possibility  of  an  indefinite  use  of  savings  and  of  an 
indefinitely  increasing  effectiveness  of  capital  is  not  a  tendency 
inherent  in  industry,  but  a  fact  of  comparatively  short  experience 
in  the  modern  world. 


38-§6]  CAPITAL  USED  IN  PRODUCTION  17 

To  put  the  same  problem  in  another  way:  the  roundabout  or 
capitaHstic  process  may  be  supposed  to  adjust  itself  to  the  supply 
of  present  means  (savings);  or  the  supply  of  present  means  may 
be  supposed  to  adjust  itself  to  the  roundabout  process.  The  first 
is  the  view  of  those  who  maintain  the  quasi-automatic  transfor- 
mation of  capital  as  it  increases,  and  the  tendency  to  diminishing 
returns  as  it  is  transformed  into  more  complex  shapes.  The  sec- 
ond seems  to  me  the  view  more  in  accord  with  historical  fact. 
The  progress  of  invention  has  taken  the  direction  of  more  elabo- 
rate and  complex  capital;  hence  there  has  been  the  possibilitj^  of 
using  a  larger  and  larger  volume  of  savings  in  productive  ways. 
The  supply  of  savings,  as  will  appear  in  the  next  chapter,  is  highly 
flexible.  It  has  taken  advantage  of  all  available  opportunities  for 
investment  and  will  contmue  to  do  so;  it  has  enabled  factories, 
machinery,  railways,  steamships,  electric  appliances,  to  be  made 
as  fast  as  inventors  have  shown  the  way  to  the  effective  use  of 
these  forms  of  capital.  It  is  true  that  in  this  matter,  as  in  so 
many  others  dealt  with  by  the  economist,  there  has  been  an  inter- 
action of  causes;  none  the  less  it  is  more  nearly  true  to  say  that 
the  progress  of  the  arts  has  made  possible  the  vast  investment  of 
savings  than  that  the  great  volume  of  savings  has  brought  about 
the  progress  of  the  arts. 

But  the  differences  in  opinion  on  this  point  do  not  affect  the 
main  conclusion  stated  above  —  that,  at  any  given-periodj  the 
rate  of  return  oa  capital  depends  on  the  gain  in  p^O(hlcti^'encss 
fesuTting  from  tlie  least  eii'ectix'e  part  df  tlie  capital.  So  far  as 
this  proposition  is  eoneerne  1,  there  seems  to  be  substantial  agree- 
ment among  modern  economists.  Whether  or  no  it  is  believed 
that  there  is  a  really  separate  productivity  of  the  capital  as  dis- 
tinct from  the  labor,  and  whether  or  no  it  is  believed  that  the 
differences  in  the  productivity  of  capital  show  themselves  thru  a 
process  of  diminishing  returns,  it  seems  to  be  agreed  that'the 
factor  which  determines  the  rate  of  interest  on  capital  used  for 
production  (so  far  as  it  is  dependent  on  demand)  is  the  gain  in 
efficiency  or  output  accruing  with  the  last  or  marginal  installment 
of  capitah ■ — -'^ 


18  THE  DISTRIBUTION  OF  WEALTH  [3^§7 

§7.  It  has  been  remarked  in  the  preceding  section  that  there 
is  no  necessary  connection  between  the  amount  of  capital  and  its 
productivity.  Account  must  be  taken  of  the  march  of  invention, 
of  the  irregular  course  of  improvements  in  the  arts.  This  element 
of  irregularity  is  connected  with  the  human  factor,  too  much 
neglected  in  the  traditional  discussion  of  interest  on  capital. 

Each  and  every  use  of  abundant  present  resources  for  the  pur- 
pose of  elaborate  equipment  means  that  some  one  must  plan  it 
and  manage  it.  Elsewhere  the  Utopian  character  of  many  expec- 
tations about  large-scale  production  has  been  dwelt  on,^  —  the 
notion,  for  example,  that  doubling  of  the  size  of  establishments 
of  itself  brings  greater  effectiveness.  There  must  be  men  behind 
the  guns.  Not  the  mere  making  or  mere  enlargement  of  plant 
brings  increase  of  return,  but  the  choice  of  the  best  ways  of  mak- 
ing and  enlarging  it.  Now,  in  the  modern  organization  of  indus- 
try, the  persons  who  direct  the  capitalistic  processes  and  those 
who  provide  the  present  means  needed  for  their  expansion  are 
not  the  same.  The  acting  managers  are  indeed  themselves  savers 
and  owners  of  capital;  associated  with  them,  yet  in  the  main  sep- 
arate, is  the  great  class  of  inert  savers.  The  two  sets  —  business 
men  and  investors  —  find  between  them  that  intensification  of 
equipment  meets  with  a  profitable  response.  But  the  increase  in 
output  is  not  due  merely  to  the  lengthening  of  the  productive 
process  or  the  accumulation  of  available  present  means.  Depend- 
ent tho  it  be  on  these  factors,  it  is  brought  to  fruition  only  by 
proper  management. 

Hence  there  arises  a  question  of  the  division  of  the  gain.  The 
larger  the  number  of  first-rate  managers,  and  the  smaller  the  sup- 
ply of  present  means,  the  more  likely  is  it  that  the  savers  will  get 
the  lion's  share,  and  rates  of  interest  tend  to  be  high;  with  the  op- 
posite results  if  savers  are  many  and  managers  scarce.  If  there 
be  a  good  supply  of  fairly  capable  managers,  but  a  few  among 
them  who  tower  above  their  fellows  in  ability  to  handle  great 
capitalistic  enterprises,  these  few  will  reap  a  large  harvest,  which 
yet  will  not  redound  to  the  advantage  either  of  the  savers  or  the 

»  See  Chapter  4,  5  3. 


38-§7]  CAPITAL  USED  IN  PRODUCTION  19 

mass  of  business  men.  All  this  is  connected  with  the  theory  of 
business  profits,  presently  to  be  considered.  It  is  one  of  the  many 
indications  how  interdependent  are  the  several  phases  of  the 
theory  of  distribution.  What  needs  to  be  emphasized  at  this 
stage  is  that  the  human  factor  —  able  leadership  —  is  indispen- 
sable for  bringing  the  capitalistic  mechanism  to  work  with  suc- 
cess. Nothing  in  economics  is  automatic.  Everywhere  we  have 
to  deal  with  human  beings,  with  their  limitations,  their  habits 
and  traditions  and  motives,  the  extraordinary  differences  between 
them;  with  doings  whose  general  outcome  may  be  predictable,  but 
which  show  in  individual  cases  the  greatest  divergence  and  the 
greatest  unpredictability. 


CHAPTER  39 

Interest,  continued.     The  Equilibrium  of  Demand 
AND   Supply 

Section  1.  Accumulation  of  present  means  needs  an  inducement,  20  —  Sec.  2. 
The  gradations  in  the  disposition  to  save.  Cases  where  the  inducement 
needs  to  be  shght,  21  —  Sec.  3.  Cases  where  a  return  is  sought.  Pos- 
sibility that  a  lowered  return  will  sometimes  induce  larger  savings.  More 
often,  lowered  return  checks  saving.  The  conception  of  marginal  savers, 
24  —  Sec.  4.  Diagrams  expressing  the  equilibrium  of  supply  and 
demand.  Savers'  surplus,  27  —  Sec.  5.  The  steadiness  of  the  rate  of 
interest  in  modern  times  and  its  significance,  30  —  Sec.  6.  The  race 
between  accumulation  and  improvement,  32. 

§  1.  We  turn  now  to  the  conditions  of  supply  for  capital,  and 
to  the  equilibrium  of  supply  and  demand.  The  rate  of  interest, 
like  the  value  of  a  commodity,  is  settled  at  any  given  period 
chiefly  by  demand.  But  in  the  long  run  the  variations  in  supply 
must  have  their  effects  also.  What  is  the  situation  of  those  per- 
sons who  have  a  surplus  of  present  means  —  the  lenders? 

If  the  accumulation  of  a  surplus  were  in  no  way  irksome,  the 
supply  of  present  means  or  savings  would  increase  rapidly  and 
indefinitely  under  the  inducement  of  a  reward  in  the  way  of  in- 
terest. So  long  as  borrowers  were  willing  to  pay  a  premium  — 
to  return  to  lenders  more  than  had  been  supplied  by  the  lenders 
—  these  latter  would  accumulate  more  and  more,  and  their  in- 
creasing savings,  put  at  the  disposal  of  producers,  would  allow 
greater  and  greater  advances  to  laborers.  Assuming  the  arts  to 
remain  the  same,  and  no  new  ways  to  be  found  for  increasing  the 
productiveness  of  labor  by  more  elaborate  implements,  the  stage 
would  be  reached  when  the  additional  advances  to  laborers  would 
bring  no  addition  to  the  output.  The  marginal  productivity  of 
capital  would  then  be  nil,  and  interest  on  capital  would  disap- 
pear.    If,  in  fact,  this  stage  is  not  reached,  the  reason  must  be 

20 


39-§2]      EQUILIBRIUM  OF  DEMAND  AND  SUPPLY  21 

that  accumulation  and  paving  do  not  continue  indefinitely  unless 
there  be  some  inducement  offered. 

§  2.  Does  saving  —  the  putting  by  of  present  means  —  neces- 
sarily depend  on  a  reward  in  the  way  of  premium  or  interest? 
This  question,  be  it  observed,  is  quite  different  from  one  of  a  re- 
lated sort  already  considered,  namely,  do  the  making  and  the 
maintenance  of  capital  depend  on  saving  at  all?  It  is  sometimes 
said,  more  often  tacitly  assumed,  that  capital  maintains  itself  by 
some  automatic  process,  quite  independently  of  the  dispositions 
or  intentions  of  its  owners.  This  view  has  been  held  by  j>ersons 
quite  free  from  any  socialistic  taint.^  The  socialists  themsglvev- 
^o  often  they  quite  ignore  the  problem  of  ca|>ttat"accumulation, 
jusually  assume  that  this  is. a  matter  which  takes  care  gfjtself^— -It 
is  true  that  in  a  highly  organized  modern  society  it  may  seem  to 
do  so.  Plant  and  machinery,  as  they  wear  out,  are  steadily  re- 
placed; new  plant  and  machinery  are  steadily  made.  But  we 
have  seen  that  back  of  all  this  are  the  processes  of  saving  and  in- 
vestment; and  have  seen,  too,  that  not  only  the  creation  of  new 
capital  involves  saving,  but  the  maintenance  of  existing  capital 
also.2  With  the  constant  wearing  out  of  the  productive  apparatus, 
and  the  constant  need  of  replacing  it  if  the  equipment  is  to  be 
kept  intact,  a  choice  is  recurrently  presented  to  the  owners  as  to 
the  way.  in  which  tliey  shall  use  their  surplus  possessions  — 
whether^they  shall  continue  investment  and  maintain  capital,  or 
cease  investment  and  cause  ]a])()r  to  be  directed  to  making  con- 
sumable goods.  For  any  given  period  they  may  have  committed 
themselves  irrevocably  to  investment,  and  cannot  change  the 
form  which  their  property  has  taken.  But  as  time  passes,  and 
the  process  of  using  and  renewing  the  various  kinds  of  wealth 
goes  on,  they  have  again  the  option  which  they  had  in  the  initial 
stages.  They  may  save  and  invest,  or  they  may  spend  and 
enjoy.  However  considerable  thelength  of  time  over  which  the 
capital  of  a  community,  when  once  constructed,  endures  in  the 
shape  which  has  been  given  it,  and  however  slow  the  process  by 

*  See  for  example  J.  B.  Clark,  Distribution  of  Wealth,  Ch.  IX. 
2  See  Chapter  5,  §  6. 


22  THE  DISTRIBUTION  OF  WEALTH  [39-§  2 

which  the  disposition  of  the  capitalists  takes  effect,  it  is  still  true 
that  in^the  long  run  the  owners'  intention  determines  whether 
there  shall  or  shall  not  be  capital. 

But,  to  repeat,  there  is  the  other  question:  granting  that  the 
making  and  maintenance  of  capital  do  involve,  saving,  must  there 
be  a  pecuniary  inducement,  a  payment  of  interest,  in  order  to 
bring  people  to  save?  It  is  certain  that  this  is  not  universally 
the  case.  There  is  a  considerable  volume  of  saving  which  would 
S^take  place  even  if  there  were  no  premium  —  if  the  amount  paid 
back  in  the  future  by  the  borrower  were  no  greater  than  the 
amount  now  supplied  by  the  lender.  Nay,  a  situation  is  conceiv- 
able under  which  the  familiar  relation  would  be  reversed;  then 
not  the  borrower,  but  the  lender,  would  pay  a  premium.  On  the 
other  hand,  there  are  savings  which  would  not  take  place  at  all 
except  for  the  reward  which  is  commonly  paid  by  the  borrower 
as  interest.  These  gradations  in  the  conditions  under  which  ac- 
cumulation and  lending  take  place  call  for  some  detailed  consid- 
eration. 

One  extreme,  just  referred  to,  is  of  theoretical  concern  rather 
than  of  practical  importance:  the  case  of  the  lender  who  is  so 
desirous  of  providing  for  the  future  that  he  is  willing  to  accept  at 
a  later  date,  as  the  price  of  the  safety  of  his  possessions,  a  less 
sum  than  he  parts  with  in  the  present.  This  situation  might  con- 
ceivably arise  where  means  were  very  abundant  in  the  present 
and  where  a  future  with  scantier  means  was  expected.  Thus  a 
man  in  his  prime,  with  good  earning  power  but  without  income- 
yielding  investments,  knowing  that  old  age  must  come,  might  set 
aside  a  considerable  amount  from  his  present  income  in  order  to 
be  assured  at  a  later  date  of  an  even  smaller  sum.  At  forty,  S200 
might  be  saved  from  an  ample  income  with  comparative  ease; 
and  it  is  conceivable  that  it  would  be  saved  cheerfully  in  order 
to  have,  at  the  age  of  seventy,  the  certainty  of  $150.  Hence,  if 
no  other  choice  presented  itself,  an  exchange  of  $200  at  forty,  for 
$150  to  be  received  thirty  years  later,  would  not  be  out  of  the 
question.  There  might  be  negative  interest,  so  to  speak.  But 
another  very  simple  choice  in  fact  presents  itself.    The  $200  may 


39-§2]      EQUILIBRIUM  OF  DEMAND  AND  SUPPLY  23 

be  set  aside,  tucked  away,  and  kept  until  the  later  date  when  the 
need  becomes  greater.  It  may  be  hoarded,  without  being  lent  or 
invested.  This,  of  course,  is  feasible  only  if  there  be  some  kind  of 
commodity  which  does  not  deteriorate,  which  can  be  easily  safe- 
guarded, and  which  maintains  its  value.  If  men  lived  in  primi- 
tive conditions,  and  all  incomes  were  received  and  managed  in 
kind  —  if  the  actual  bread  and  meat  had  to  be  put  aside  in  order 
to  provide  for  the  future  —  a  bargain  for  giving  a  greater  amount 
of  such  perishable  things  in  the  present  for  the  guarantee  of  a  less 
amount  in  the  future  might  be  consummated.  But  money  brings 
an  easy  alternative  between  present  and  future  use.  Given  se- 
curity and  ordered  government  —  given  also  stable  value  of 
money  —  then  money  in  hand  is  as  good  as  money  in  the  future. 
Specie  or  its  equi^^alent  in  paper  money  can  be  hoarded  with  little 
trouble ;  elaborate  safe-deposit  boxes  are  to  be  had  at  a  charge  in- 
significant in  proportion  to  what  they  will  contain.  Hence  we 
may  set  aside  as  negligible  the  possibility  of  negative  interest. 
The  present  will  command  at  least  par  in  the  future.  It  is  this 
sort  of  reasoning  that  led  Bohm-Bawerk  to  lay  down,  in  some- 
what technical  terms,  the  general  proposition  that  present  goods 
are  always  at  least  equal  in  value  to  future  goods  of  like  kind  — 
because  a  choice  exists  between  present  and  futiu-e  use.^ 

But  tho  the  cases  in  which  interest  might  be  negative  may  thus 
be  neglected,  those  in  which  it  might  be  zero  are  many.  Great 
masses  of  savings  are  made  quite  without  the  need  of  stimulus  in 
the  way  of  premium  or  interest.  In  such  cases  present  means 
might  be  exchanged  for  future  means  at  par.  A  large  part  of  the 
deposits  in  savings  banks  in  most  civilized  countries  are  probably 
of  this  nature.  A  great  number  of  persons  have  acquired  the 
habit  of  providing  against  a  rainy  day.  Where  a  seciu-e  and  con- 
venient depository  is  offered,  they  set  aside  something  from  cur- 
rent means  as  a  safeguard  against  future  emergencies.    If  interest 

'  It  is  still  conceivable  that,  with  most  perfect  facilities  for  hoarding,  a  few 
highly  timorous  persons  would  pay  negative  interest  for  a  supposedly  unquestion- 
able guarantee  of  the  future;  just  as  a  few  timorous  investors  may  insist  on  buy- 
ing government  beads  bearing  very  low  interest,  rather  than  the  safest  of  privately 
issued  securities. 


24  THE  DISTRIBUTION  OF  WEALTH  [39-§  3 

is  paid  on  such  savings  it  is  welcome  enough;  but  the  savings 
would  be  made  in  any  case.  Not  only  deposits  in  savings  banks, 
but  the  accumulations  of  life  insurance  companies  from  annual 
premiums  partake  in  some  degree  of  this  character.  Provision  for 
dependents,  by  annual  payments  thru  the  mechanism  of  insur- 
ance, would  be  made  even  if  these  annual  payments  were  not 
augmented,  as  in  fact  they  are,  by  the  interest  added  to  them  by 
the  insuring  companies.  How  large  is  the  proportion  of  savings  bank 
and  life  insurance  accumulations  made  with  this  sole  motive,  it  is 
impossible  to  measure;  but  the  proportion  niust  be  considerable. 

§3.  On  the  other  hand,  there  are  accumulations  that  will  not 
be  made  except  for  the  stimulus  of  a  rew^ard.  Some  receipt  of  in- 
terest is  indispensable  for  a  large  part,  probably  the  larger  part, 
of  the  savings  made  in  modern  communities.  Yet  this  stimulus 
does  not  need  to  be  applied  in  its  full  strength  over  the  whole 
range.  Much  saving,  that  is  done  with  a  view  to  some  return 
would  yet  continue  even  if  the  return  were  lowered.  Other  sav- 
ing, again,  requires  the  full  current  rate  for  its  continuance.  The 
differences  between  the  various  degrees  of  stimulus  required  (i.e. 
the  various  rates  of  return)  are  no  less  noteworthy  than  the  broad 
difference  between  some  return  and  no  return  at  all. 

Suppose  the  rate  of  interest,  which  for  many  generations  had  been 
somewhere  near  four  or  five  per  cent,  should  drop  very  sharply  to 
two  per  cent,  or  one  per  cent.  No  doubt  many  persons  would 
cease  to  save.  But  many  others,  especially  those  with  large  pres- 
ent means  —  those  who  have  enough  and  to  spare  in  any  case 
—  would  maintain  their  accumulations  unchecked. 

Perhaps  the  most  characteristic  and  quantitatively  important 
case  of  this  sort  is  that  of  the  successful  business  man.  He 
"makes  money,"  in  the  current  phrase;  which  means  that  his 
earnings  considerably  exceed  his  habitual  living  expenses,  and 
that  he  puts  by  something  for  the  future  without  sensible  depriva- 
tion of  present  pleasures.  The  aim  of  such  men  usually  is  to  ac- 
cumulate a  competence  or  a  fortune.  In  a  country  like  England, 
the  founding  of  a  "family"  is  a  common  aim:  the  transmission  to 
children  of  a  sum  sufficient  to  enable  them  to  take  their  place 


39-§3]      EQUILIBRIUM  OF  DEMAND  AND  SUPPLY  25 

among  the  leisure-class  idlers,  to  attain  association  or  matri- 
monial alliance  with  the  gentry  and  aristocracy,  and  eventually,  if 
there  be  money  enough  and  some  address,  to  be  awarded  a  knight- 
hood or  even  a  peerage.  In  all  modern  communities  the  worship 
of  "society-,"  perhaps  the  most  ubiquitous  phase  of  the  deep- 
rooted  and  universal  love  of  distinction,  contributes  powerfully  to 
accumulation.  No  doubt,  among  the  active  men  of  affairs  other 
motives  play  their  part,  such  as  the  love  of  power,  the  impulse 
for  activity,  mere  imitation  and  emulation.  Certain  it  is  that 
money-making  is  impelled  by  very  complex  motives.  Among 
these  no  specific  rate  of  return  on  accumulation  plays  a  dominant 
part. 

It  has  been  suggested  by  some  writers  that  within  a  consider- 
able range  a  decline  in  the  rate  of  interest,  so  far  from  checking 
accumulation,  would  increase  it.  Man}^  persons  among  the  well- 
to-do  look  forward  to  providing  a  settled  income  for  the  future, 
either  for  themselves  on  their  retirement  from  activity  or  for 
their  widows  and  children.  In  order  to  provide  a  "satisfactory" 
income  of  say  S5000  a  year,  a  capital  sum  of  $100,000  must  be 
put  by  if  the  rate  of  interest  is  5  per  cent.  But  if  the  rate  is  2i 
per  cent,  double  the  sum  must  be  put  by  in  order  to  bring  the 
same  income.  On  this  sort  of  reckoning,  the  lower  the  rate  of 
return,  the  greater  will  be  the  amount  accumulated  and  invested. 

Such  reasoning,  however,  cannot  be  pressed  far.  No  doubt 
there  are  cases  in  which  a  decline  in  the  rate  prompts  a  wish  to 
get  together  a  larger  capital  sum.  But  a  wish  is  very  different 
from  a  deed.  For  the  immense  majority  of  men  it  would  be  a 
very  diflBcult  matter  to  double  the  amount  accumulated.  Among 
those  who  have  very  large  current  incomes  but  still  wish  to  accu- 
mulate a  capital  sum  —  the  small  number  of  business  men  and 
professional  men  whose  earnings  are  high  —  it  may  be  true  that 
a  decline  in  interest  will  increase  rather  than  lessen  savings.  But 
most  men  who  are  accumulating  with  a  view  to  building  up  a 
"  competence,"  cannot  with  ease  increase  their  savings  materially, 
not  to  mention  doubling  them.  There  are  constant  and  pressing 
demands  of  the  moment,  innumerable  tempting  ways  of  spending 


26  THE  DISTRIBUTION  OF  WEALTH  [39-§  3 

money  at  once.  A  decline  in  the  rate  of  interest  is  quite  as  likely 
to  lead  to  a  readjustment  of  the  scale  of  what  is  a  "  competency " 
or  a  "satisfactory"  income  in  the  future  as  it  is  to  induce  greater 
savings.  In  the  supposed  case,  the  man  who  had  looked  forward 
to  providing  for  himself  or  his  family  an  income  of  $5000  on  a 
capital  of  $100,000  is  likely  to  say,  when  the  rate  falls  to  two 
and  one  half  per  cent  —  an  income  of  $2500  must  suffice ! 

On  the  other  hand,  with  many  individuals  and  for  great  amounts 
of  savings  the  usual  relation  of  price  to  supply  appears  —  namely, 
a  higher  price  leads  to  an  enlargement  of  supply  and  a  lower  price 
to  a  lessening  of  supply.  Stated  with  reference  to  interest  and 
capital,  the  proposition  is  that  an  increase  in  the  rate  will  bring 
more  savings  and  more  capital,  a  decrease  less  savings  and  less 
capital.  No  one  would  doubt  that  if  the  rate  rose  to  twenty  per 
cent,  many  sums  would  be  set  aside  and  invested  which  at  a  lower 
rate  would  be  spent  for  immediate  satisfactions.  Conversely,  if 
the  rate  were  to  fall  to  one  per  cent,  or  to  one  half  of  one  per 
cent,  many  sums  would  be  spent  at  once  which  at  a  higher  rate 
are  saved.  Between  these  possible  extremes  is  the  current  rate 
of  something  like  four  or  five  per  cent;  and  among  the  various 
savings  there  are  some  for  which  that  current  rate  is  just  enough 
to  induce  the  sacrifice  involved. 

Thus  we  reach  the  conception  of  a  margin.  There  are  intra- 
marginal  savings  and  marginal  savings;  and  also,  it  may  be 
added,  extramarginal  or  potential  savings.  There  are  the  willing 
and  almost  spontaneous  savers  —  those  whose  motives  for  accu- 
mulation are  so  strong  that  they  would  continue  even  if  there 
were  no  return  at  all.  There  are  the  less  spontaneous  but  still 
eager  savers,  who  need  the  stimulus  of  some  return  but  would  go 
on  even  tho  that  return  were  lower  than  the  current  rate.  There 
are  the  niarginal  savers  —  cool  and  calculating  persons  we  may 
conceive  them  —  for  whom  the  existing  rate  of  interest  is  just 
enough  to  induce  the  sacrifice  of  present  for  future.  And  finally 
there  are  the  extramarginal  savers,  who  do  not  now  accumulate, 
but  would  be  led  to  do  so  if  the  return  were  to  increase. 

In  strictness,  we  should  speak  not  of  more  or  less  willing  sav- 


39-§4]      EQUILIBRIUM  OF  DEMAND  AND  SUPPLY 


27 


ers,  but  of  installments  of  savings  more  or  less  easily  induced. 
The  same  person  may  be  very  differently  disposed  as  regards  dif- 
ferent parts  of  his  accumulations.  Something  he  may  put  by  in 
any  case  for  a  rainy  day;  something  more  he  may  put  by  from 
the  love  of  social  distinction,  or  from  other  motives  in  which,  tho 
the  expectation  of  some  return  plays  a  part,  a  higher  or  lower 
rate  is  not  decisive.  Something  more,  finally,  he  can  be  induced 
to  save  only  under  the  stimulus  of  a  return  at  the  existing  rates. 
The  gradation  runs  not  by  individuals,  but  by  installments. 
There  are  marginal  savings,  even  tho  there  is  perhaps  no  indi- 
vidual all  of  whose  savings  are  at  the  margin. 

§4.  The  outcome  of  the  discussion  of  demand  (carried  on  in 
the  preceding  chapter)  and  supply  (in  the  present  chapter)  can 
be  stated  in  simple  form  under  the  theory  of  value.    The  several 


ITio.  1. 


installments  of  savings  are  to  be  had  at  various  rates,  some  for  a 
small  reward,  some  for  a  larger  reward.    The  case  thus  is  one  of 


28  THE  DISTRIBUTION  OF  WEALTH  [39-§  4 

varying  supply  price,  coming  under  the  principle  of  increasing 
costs.  A  diagram  of  the  familiar  sort  will  illustrate  the  situa- 
tion.* 

The  conditions  of  demand  are  indicated  by  the  line  DD',  whose 
descending  slope  represents  the  diminishing  productiveness  of  the 
several  installments  of  capital.  The  ascending  line  ORS  indicates 
the  conditions  of  supply  —  the  increasing  prices  which  must  be 
paid  in  order  to  induce  the  several  installments  of  savings  which 
enable  the  capital  to  be  forthcoming.^  This  line  in  its  earlier  part 
does  not  rise  above  the  base  line  OB.  That  is,  some  savings  would 
be  made,  even  if  nothing  were  paid  in  the  way  of  interest  on  capi- 
tal. Nay,  if  we  believe  that  the  disposition  and  incentive  to  pro- 
vide for  the  future  is  so  great  among  some  savers  that  a  smaller 
sum  in  the  future  will  be  accepted  by  them  in  return  for  a  larger 
sum  in  the  present,  the  line  in  its  earlier  part  will  sink  below  the 
base  line,  and  will  begin  at  0'.  There  would  be  negative  interest 
if  the  rate  were  determined  solely  by  the  competition  of  these 
persons.  As  we  reach  installments  as  to  which  the  disposition  to 
save  is  less  and  less  strong,  and  more  and  more  must  be  paid  in 
order  to  induce  accumulation,  the  line  rises.  Finally,  we  reach 
the  marginal  saver  at  B.  The  price  at  which  he  is  willing  to  save 
corresponds  to  the  gain  which  is  secured  from  the  use  of  the  mar- 
ginal increment  of  capital.  Here  equilibrium  is  reached;  the  rate 
of  interest  settles  at  a  point  where  the  marginal  productivity  of 
capital  suffices  to  bring  out  the  marginal  installment  of  saving. 

Evidently  those  persons  whom  we  have  designated  as  spon- 
taneous savers  —  those  who  are  disposed  to  save  under  any  cir- 
cumstances —  gain  something  in  the  nature  of  a  surplus.  The 
total  amount  paid  as  interest  is  indicated  by  the  rectangle 
PP'BO.  There  is  a  large  amount  of  savers'  surplus  or  savers' 
rent,  indicated  by  the  area  ORP'P,  or  possibly  O'RP'P.     For 

*  Compare  Chapter  13. 

*  The  sacrifices  or  disutilities  involved  in  the  installments  are  not  necessarily 
measured  by  the  prices  calling  them  out.  Those  savings  which  would  be  made 
without  interest  (rainy-day  savings)  may  involve  serious  sacrifice.  Here,  aa  in 
Book  II,  the  supply  schedule  relates  to  the  matter-of-fact  question  of  the  price 
which  must  be  paid  in  order  to  call  out  a  given  supply. 


39-§4]      EQUILIBRIUM  OF  DEMAND  AND  SUPPLY 


29 


those  who  would  save  in  any  case,  the  whole  of  the  interest  which 
they  receive  is  in  the  nature  of  surplus.  For  those  who  would  be 
willing  to  save  at  a  smaller  rate  than  that  current,  a  part  of  what 
they  receive  in  interest  is  surplus. 

How  great  now  is  this  surplus  in  modern  civilized  communities? 
or,  in  other  words,  what  is  the  conformation  of  the  line  ORP'?  In 
Figure  1  it  is  represented  as  rising  slowly  from  OR,  and  approach- 
ing P'  somewhat  steeply;  indicating  that  much  saving  would  be 
done  for  less  than  the  marginal  or  market  price,  and  that  there  is 
a  large  amount  of  savers'  surplus.  But  it  is  no  less  possible  that 
ORP'  should  rise  steeply  from  OR,  and  then  move  nearly  parallel 
to  PP',  as  in  Figure  2;  indeed,  it  may  be  coincident  with  PP'  in 


Fia.  2. 


the  latter  part  of  its  course.  In  other  words,  a  large  part  of  the 
saving  may  need  the  stimulus  of  the  whole  current  rate  of  retiu-n, 
or  nearly  the  whole,  and  savers'  surplus  may  be  correspondingly 
less  in  amount.  And  a  further  question  arises  as  to  the  confor- 
mation of  the  supply  line  beyond  P'.    Suppose  there  is  a  general 


30  THE  DISTRIBUTION  OF  WEALTH  [39-§  5 

increase  in  demand  (which  would  be  indicated  by  a  shifting  of  the 
demand  curve  to  the  right)  —  will  the  rate  of  interest  perma- 
nently rise,  or  will  the  supply  of  savings  and  capital  extend  and 
bring  the  rate  of  return  back  to  the  amount  BP'?  In  other 
words,  is  BP'  capable  of  being  continued  to  the  right  indefinitely, 
prolonging  the  horizontal  line  PP'  beyond  P'  without  rising  in  its 
further  course?  To  some  of  these  questions  our  answers  must  be 
quite  uncertain;  and  even  for  those  which  we  can  answer  with 
some  assurance  we  must  rely  on  general  observation  rather  than 
on  any  acciu-ate  data. 

As  has  already  been  intimated,  it  is  tolerably  clear  that  there 
is  much  of  savers'  surplus;  but  how  much,  it  is  impossible  to  say. 
One  might  hazard  the  guess  that  the  line  ORP'  has  some  such 
conformation  as  is  shown  in  Figure  2;  that  after  lingering  for  a 
part  of  its  length  along  OB,  it  rises  gradually  to  a  point  near  PP', 
and  in  the  latter  part  of  its  course  runs  nearly  parallel  to  PP'  or 
coincident  with  it.  Thence  it  would  follow  that  a  decline  in  the 
demand  for  capital,  unless  very  great,  would  not  sensibly  affect 
the  rate  of  return  on  it;  since  the  decline  in  the  rate  would  check 
many  savings  which  were  at  the  margin  or  near  the  margin,  and 
hence  would  bring  about  a  decline  in  the  supply  of  capital.  No 
test  of  this  kind,  however,  is  likely  to  be  applied  in  modern  com- 
munities. The  demand  for  capital  has  grown  enormously  during 
the  last  century  or  two,  and  there  is  no  indication  that  it  will 
cease  to  grow  in  the  future.  In  other  words,  the  gain  from  the 
use  of  more  and  more  capital  in  production  has  been  great,  and 
promises  to  continue  great.  The  progress  of  invention  and  of 
improvement  in  the  arts  has  steadily  moved  the  line  DD'  (at  least 
in  its  lower  reaches)  to  the  right;  it  has  never  shifted  the  line  to 
the  left.  At  the  same  time,  the  response  of  the  supply  of  capital 
has  been  rapid  and  sure.  Notwithstanding  the  vast  increase  in 
demand,  the  rate  of  interest  has  remained,  on  the  whole,  singu- 
larly even ;  indicating  that,  so  far  as  the  extension  of  ORP'  toward 
the  right  goes,  it  has  been  prolonged,  and  probably  will  continue 
to  be  prolonged,  without  any  permanent  tendency  to  rise. 

§5.  The  steadiness  of  the  rate  of  interest  during  the  vast 


^^ "    \  vyA  £^ 


o^ 


39-§5]     EQUILIBRIUM  OF  DEMAND  AND  SUPPLY  31 

chanf^es  since  the  industrial  revolution  of  the  eighteenth  cen- 
tury is  a  remarkable  phenomenon.  Even  before  that  era,  inter- 
est had  fallen  to  rates  such  as  we  consider  normal.  In  Switzer- 
land during  the  seventeenth  centuix  the  ra,te  had  fallen  so  far 
that  legislation  was  enacted,  oddly  enough,  to  check  its  decline. 
Several  cantons  passed  laws  rnaking  void  all  loans  at  Ics^  than  four 
per  cent.  Nevertheless,  in  the  century  following,  the  rate  went 
down  to  that  figure  and  even  lower.  ^  Holland  and  England  were 
able  to  borrow  in  the  middle  of  the  eighteenth  century  at  about 
three  per  cent.  Sincethen  the  rate  has  fluctuated  between  a 
minimum  of  something  like  three  per  cent  and  a  maximum  of 
something  like  six  per  cent.  In  new  countries  it  has  tended  to  be 
higher  than  in  old  countries;  and  in  times  of  activity  and  of  hope- 
ful investment  it  has  been  higher  than  in  times  of  depression. 
Great  wars,  with  their  consequence  of  heavy  public  borrowing 
(of  which  more  will  be  said  presently),  have  raised  the  rate  on 
occasions;  then  it  has  slowly  declined  as  the  normal  conditions  of 
peace  have  been  gradually  restored.  During  the  first  three  quar- 
ters of  the  nineteenth  century  the  rate,  in  older  countries,  was 
usually  in  the  neighborhood  of  four  and  five  per  cent,  and  in 
newer  countries,  six  per  cent  of  a  trifle  more.  During  the  last 
quarter  of  the  nineteenth  century  it  sank  to  three  and  four  per 
cent  in  older  countries,  five  per  cent  in  newer.  After  the  opening 
of  the  tv/entieth  century  a  rise  again  appeared;  the  enormous  bor- 
rowings by  governments  for  war  purposes  then  caused  a  further 
and  very  sharp  advaiTce.  We  are  considering  here,  it  need  hardly 
be  said,  not  the  fluctuating  rates  of  interest  on  short  loans,  but 
the  long  period  rate  on  permanent  investments.  The  trend  of 
this  rate,  to  repeat,  in  view  of  the  extraordinary  increase  alike 
in  the  demand  for  capital  and  in  the  supply  of  capital,  has  been 
remarkably  even. 

From  this  it  is  perhaps  not  an  unjustified  inference  that  there 
is  a  large  volume  of  savings  at  the  margin.  The  steadiness  of  the 
rate  of  interest  thru  so  long  a  period  of  striking  changes  both  in 

^  Rappard,  Le  facteur  economique  dans  V avhnemcnt  de  la  democratie  en  Suisse, 
pp.  113,  114. 


32  THE  DISTRIBUTION  OF  WEALTH  [39-§  6 

the  uses  and  in  the  accumulation  of  capital,  would  seem  to  point 
to  a  steadying  cause  —  a  marginal  supply  price  to  which  the 
rate  of  return  on  the  whole  has  adjusted  itself.  That  supply, 
price,  to  be  sure,  is  likely  to  be  affected  in  the  future  by  the  very 
fact  of  large  accumulation,  or  at  least  by  those  general  industrial 
and  social  conditions  which  accompany  large  accumulation.  The 
increase  in  the  number  of  persons  belonging  to  the  well-to-do 
classes,  and  in  their  incomes,  causes  saving  and  investment  to  be 
greater  in  volume  and  to  entail  less  sacrifice.  The  marginal  sup- 
ply price  may  sink  in  the  course  of  the  next  fifty  years  to  some 
such  rate  as  two  per  cent.  But  the  experience  of  the  last  few 
generations  makes  a  greater  decline  improbable. 

§  6.  Even  tho  there  be  a  steadying  cause  of  the  sort  just  men- 
tioned, the  rate  of  interest  for  long  periods  —  decades  at_a_time 
—  depends  on  the  demand  for  capital  with  reference  to  a  supply 
which  is  constantly  and  quasi-automatically  increasing.  It  de- 
pends on  a  race  between  accumulation  and  improvements 

Accumulation  proceeds  fast,  and  promises  to  continue  to  pro- 
ceed fast.  It  threatens  constantly  to  increase  the  supply  of  sav- 
ings and  of  capital  to  the  point  where  a  decline  in  the  return  must 
set  in.  So  ingrained  is  the  habit  of  accumulation  among  the  pros- 
perous classes  of  modern  society,  that  it  seems  to  proceed  irre- 
spective of  the  rate  of  interest.  Only  over  considerable  periods 
and  after  a  long  disenchantment  will  a  lessening  of  the  return 
check  its  unceasing  march.  How  soon  and  how  completely  such 
a  relaxation  of  its  advance  would  take  place,  we  cannot  say. 
Neither  can  we  say  with  what  gradations  the  decline  in  interest 
itself  would  take  place.  If  there  is  a  general  and  far-reaching 
principle  of  the  kind  discussed  in  the  chapter  last  preceding  — 
that  the  use  of  added  capital  always  brings  additional  product, 
tho  at  a  diminishing  rate  —  the  process  would  be  a  slow  one; 
nay,  if  that  principle  is  of  indefinite  application,  interest  never 
would  quite  disappear,  however  vast  accumulation  might  be.  If 
there  be  not  this  supposed  possibility  of  always  using  more  and 
more  savings  in  productive  investment,  the  stage  of  vanishing  in- 
terest would  be  reached,  in  the  absence  of  improvements  and  in- 


39-§6]      EQUILIBRIUM  OF  DEMAND  AND  SUPPLY 


33 


ventions,  at  a  comparatively  early  date.  If  the  reasoning  of  the 
preceding  sections  is  sound,  accumulation  will  be  relaxed  long  be- 
fore the  return  vanishes;  yet  reluctantly  and  haltingly,  and  with 
a  constant  pressure  from  the  continuing  offerings  of  those  who 
now  enjoy  a  savers'  surplus. 

In  one  respect  there  will  always  be  an  opening  for  the  use  of 
additional  savings,  even  with  no  change  in  the  methods  of  produc- 
tion, namely,  thru  the  increase  of  population.  Additional  laborers 
need  to  have  an  additional  supply  of  the  familiar  kinds  of  ap- 
paratus. Very  few  modern  countries  have  stationary  numbers. 
France  is  the  only  large  one  whose  population  fails  to  grow.  In 
most  communities  numbers  increase.  In  so  far  there  is  obvious 
opportunity  for  the  employment  of  more  savings. 

But  in  the  main  the  way  in  which  the  increase  of  savings  can 
find  escape  from  its  difficulties  is  thru  the  parallel  advance  in  the 
arts,  calling  for  more  and  more  elaborate  forms  of  capital.  Sav- 
ings in  civilized  communities  easily  outstrip  the  growth  of  num- 
bers, even  in  a  country  of  rapidly  swelling  population  like  the 
United  States.  Hence,  to  repeat,  the  race-is  bfi-tween  improve- 
mentsjind^ccumLulation.  Given  continued  improvements  calling 
for  more  and  more  elaborate  plant  —  more  of  tjnie-consuming 
and  roundabout  applications  of  labor  —  then  savings  can  heap 
up,  and"  a  return  still  be  secured  by  the  owners  of  capital.  Such 
has  been  the  course  of  industrial  history  for  the  last  century  and  ^ 
a  half.    Such,  also,  is  apparently  to  be  its  course  at  least  for  an-   .  (/. 


other  generation  or  two. 
1 


i-U^' 


Jr 


CHAPTER  40 
Interest,  Further  Considered 

Section  1.  Loans  for  consumption  introduce  no  new  principle  as  to  demand, 
but  are  much  affected  by  the  absence  of  full  competition,  34  —  Sec.  2. 
Public  borrowing  for  wars  an  important  form  of  such  loans  in  modern 
times.  Great  wars  and  war  borrowing  give  rise  to  both  economic  and 
fiscal  problems.  For  the  problem  of  interest,  the  economic  effects  are 
important.  37  —  Sec.  3.  Durable  consumer's  goods,  as  a  form  of  invest- 
ment, again  introduce  no  new  principle,  40  —  Sec.  4.  No  grounds  for 
distinguishing  between  producer's  capital  and  consumer's  capital,  so  far 
as  interest  is  concerned.  Exchange  of  present  for  future  the  most  general 
statement  of  the  cause  of  interest,  43  —  Sec.  5.  The  mechanism  of 
banking  and  credit  makes  interest  all-pervasive,  44  —  Sec.  6.  Varia- 
tions in  the  rate  of  interest  in  different  countries  and  for  different  invest- 
ments, 45  —  Sec.  7.  The  justification  and  social  significance  of  interest, 
48. 

§  1.  Spendthrift  loans,  tho  far  less  important  in  modern  times 
than  those  for  use  in  production,  continue  to  play  a  part.  Indi- 
viduals and  public  bodies  still  borrow  to  satisfy  needs  of  the  mo- 
ment, hoping  to  repay  in  the  future  from  some  extraneous  resource. 
Pawnbrokers'  loans  are  of  this  sort  on  a  petty  scale;  the  borrow- 
ings of  nations  for  the  conduct  of  wars  are  so  on  a  great  scale. 

Such  loans  introduce  no  new  principle  concerning  the  play  of 
demand.  There  are  gradations  in  the  demands  of  the  various 
borrowers.  Some  have  pressing  needs  or  are  much  tempted  by 
opportunities  for  immediate  expenditure.  Others  have  needs  less 
pressing  or  more  caution  and  foresight.  If  we  suppose  a  fixed 
supply  of  present  means,  such  as  the  lenders  offer,  and  suppose 
loans  of  this  kind  to  be  the  only  ones,  the  rate  of  interest,  under 
effective  competition,  will  settle  at  the  point  determined  by  the 
least  eager  among  the  spendthrifts  —  by  marginal  utility  among 
the  borrowing  consumers.  If  we  suppose  this  demand  for  loans 
to  be  added  (as  in  fact  it  is)  to  the  demand  for  productive  uses, 
the  modification  of  the  conclusions  reached  in  the  last  chapter  will 

34 


40-§l]  INTEREST,  FURTHER  CONSIDERED  35 

be  simply  a  quantitative  one.  There  is  an  additional  opening  for 
the  lenders,  but  no  essential  alteration  in  the  gradations  of  de- 
mand or  in  the  play  of  the  forces  by  which  the  emerging  rate  of 
interest  is  settled. 

The  most  striking  peculiarity  in  spendthrift  loans  is  that  so 
often  there  is  no  suchthing  as  unfettered  competition,  no  such 
tjiing_as  .a.4ir£i'a.lent_or_competitive  rate  determined  at  the  mar- 
giiu  The  ignorance  and  the  necessities  of  borrowers,  their  in- 
abijity  to  pause  and  inquire  what  terms  can  be  got,  frequently 
cause  "unfair  rates"  and  "extortion"  —  phrases  which  signify 
here,  as  they  commonly  do  also  when  used  of  the  prices  of  goods, 
that  the  rates  which  would  result  from  active  competition  are  not 
in  fact  attained.^ 

Consider  pawnbrokers'  loans,  for  example.  The  borrowers  are 
usually  in  immediate  need,  often  timid,  ignorant,  and  anxious  for 
privacy.  They  are  likely  to  accept  hurriedly  such  terms  as  are 
offered  at  the  first  place  where  application  is  made.  So  strong  is 
the  general  belief  that  the  resulting  bargains  bring  an  undue  ad- 
vantage to  shrewd  and  unscrupulous  lenders  that  in  civihzed 
countries  public  authority  often  regulates  the  transactions.  Some- 
times the  rate  of  interest  is  prescribed,  that  is,  a  maximum  is  set; 
and  detailed  regulations  are  made  for  the  keeping  of  books  and 
accounts  and  concerning  the  mode  in  which  the  eventual  sale  of 
pledges  shall  take  place.  Sometimes,  as  in  France,  public  pawn- 
brokers' shops  are  established,  where  advances  are  available  at 
reasonable  rates  (that  is,  at  something  like  the  competitive  mar- 
ket rate).  Allowance,  of  course,  must  be  made  for  the  risks  in- 
volved and  for  the  heavy  expenses  of  administration.  A  rate  of 
ten  or  twelve  per  cent  on  pawnbrokers'  loans,  after  account  is 
taken  of  expenses,  amounts  to  only  a  moderate  net  rate.  But 
much  more  is  often  charged  than  suffices  to  pay  all  expenses,  to 
offset  risks,  and  to  yield  a  sufficient  return  for  the  lender's  capital 
and  labor;  hence  the  occasion  for  regulation  by  public  authority. 

In  most  semi-civilized  communities,  the  village  usurer  who 
lends  at  high  rates  to  the  improvident  or  necessitous  is  a  familiar 

^  Compare  what  was  said  in  Chapter  10,  §8,  on  "fair  prices." 


36  THE  DISTRIBUTION  OF  WEALTH  [40-§  1 

figure.  The  peasant  of  Hindustan  lives  upon  a  very  narrow  mar- 
gin. His  crops  barely  suffice  to  feed  his  family  until  the  next 
season's  crops  are  ready,  and  at  the  end  of  a  poor  season  he  must 
either  borrow  or  starve.  Not  only  is  he  often  necessitous;  he  is 
often  improvident.  At  the  marriage  of  a  daughter  or  at  a  funeral 
he  will  squander  sums  quite  out  of  proportion  to  his  means,  and 
will  borrow  on  any  terms  to  raise  the  money  —  a  heedlessness  of 
the  future  incomprehensible  to  the  calculating  Western  observer. 
The  usurer  has  him  in  his  clutches.  So,  also,  it  was  in  the  old  days 
with  the  fellaheen  in  Egypt.  One  of  the  boons  which  the  English 
administration  in  Egypt  has  brought  the  native  is  the  establish- 
ment of  a  semi-public  bank  which  has  undertaken  to  displace 
usury  by  offering  loans  at  competitive  rates.  In  many  parts  of 
Europe,  in  Austria,  in  Ireland,  in  Russia,  the  lender  of  small  sums 
to  agricultural  producers  is  a  usurer;  that  is,  he  is  removed  from 
the  influence  of  competition,  he  lends  to  poor  and  ignorant  per- 
sons, and  he  exploits  the  possibilities  of  the  case. 

In  medieval  times  the  acceptance  of  interest  by  lenders  was 
prohibited,  at  least  for  Christians  (the  prohibition  was  by  church 
law,  and  applied  to  Christians  only;  hence  the  position  of  the 
Jews  as  money  lenders).  To  receive  from  the  borrower  more  than 
had  been  lent  him  was  thought  unrighteous.  The  explanation  of 
this  attitude,  so  different  from  the  present-day  acceptance  of  in- 
terest as  a  matter  of  course,  is  probably  in  the  main  that  during 
the  Middle  Ages  borrowing  was  chiefly  for  consumption.  When 
the  borrower  uses  loans  for  his  own  gainful  operations,  the  bar- 
gain between  him  and  the  lender  for  interest  seems  natural  and 
equitable.  But  where  he  is  in  need,  and  uses  the  loan  to  satisfy 
pressing  wants,  the  lender's  requirement  of  interest  has  an  aspect 
of  harshness.  Moreover,  in  medieval  times  competition  and  mar- 
ket rates  of  interest  hardly  existed.  Such  loans  as  were  con- 
tracted were  often  on  terms  fixed  by  the  necessities  of  the  indi- 
vidual borrower.  As  the  division  of  labor  and  the  use  of  money 
spread,  as  industry  became  more  complex  and  the  instruments  of 
production  more  mobile,  loans  for  production -became,  common; 
and  with  this  change  came  a  change  in  men's  point  of  view  re- 


40-§2]  INTEREST,  FURTHER  CONSIDERED  37 

garding  interest.  The  exceptions  to  the  original  strict  rule  of  the 
canon  law,  the  excuses  and  explanations  for  departing  from  it, 
the  nominal  retention  of  the  prohibition  with  growing  practical 
relaxation,  the  final  acceptance  of  interest  on  loans  as  a  familiar 
and  normal  phenomenon  —  all  this  illustrates  the  process  by 
which  men  slowly  adjust  their  conceptions  to  new  ways  and  new 
institutions. 

§  2.  One  form  of  loans  for  consumption  remains  of  great  quan- 
titative importance  in  modern  times  —  public  borrowing  for 
^;ars.  Where  highways  or  railways  or  irrigation  works  are  con- 
structed from  public  loans,  we  have  the  ordinary  phenomena  of 
saving,  investing,  capital  making.  But  where  the  sums  advanced 
by  investors  are  used  for  war  expenditures,  we  have  saving  and 
investing,  but  no  resulting  capital.  We  have  vast  waste  by  con- 
tending armies,  and  great  loans  which  —  so  far  as  their  strictly 
economic  consequences  are  concerned  —  are  essentially  of  the 
spendthrift  sort.  The  drain  on  savings  for  this  purpose  has  been 
enormous.  Every  great  struggle  has  caused  hundreds  of  millions, 
even  thousands  of  millions,  to  be  borrowed  and  squandered  — 
squandered,  that  is,  so  far  as  concerns  the  economic^consequences. 

The  conditions  of  demand  for  this  sort  of  use  are  highly  inelas- 
tic. When  a  nation's  blood  is  up,  the  means  for  prosecuting  a 
war  are  demanded  at  any  price.  Hence  prolonged  fighting  often 
causes  a  rise  in  the  rate  of  interest  which  endures  for  years,  per- 
liaps  for  a  generation.  The  Napoleonic  wars,  especially  because 
of  the  huge  loans  contracted  by  Great  Britain  to  carry  them  on, 
affected  the  current  rate  of  interest  thru  the  first  quarter  of  the 
nineteenth  century.  In  the  second  half  of  that  century  there  was 
a  succession  of  wars  and  of  consequent  borrowings  —  the  Crimean 
War  of  1854-1855,  that  of  France  and  Italy  against  Austria  in 
1859,  the  American  Civil  War  of  1861-1865,  that  of  Prussia  and 
Italy  against  Austria  in  1866,  of  France  and  Germanj'^  in  1870- 
1871,  of  Russia  and  Turkey  in  1876-1878,  of  Great  Britain  with  the 
Boer  Republic  in  1899.  Each  caused  public  loans  to  be  contracted 
at  home  and  abroad,  and  each  had  its  effect  on  the  investment 
market  in  the  world  at  large.    The  whole  series  tended  to  bolster 


38  THE  DISTRIBUTION  OF  WEALTH  [40-§  2 

up  the  rate  of  interest  over  a  long  period.  During  the  Great  War 
of  1914-1918,  loans  were  contracted  by  the  billion,  and  the  pub- 
lic debts  not  only  of  the  warring  countries  but  to  a  considerable 
extent  those  of  the  neutrals  also  were  swelled  to  dimensions  un- 
dreamed of  before.  Under  the  pressure  of  this  extraordinary  de- 
mand the  rate  of  interest  was  doubled  the  world  over. 

In  all  these  periods  of  struggle  and  waste,  the  high  rate  of  in- 
terest probably  served  to  bring  out  some  savings  that  otherwise 
would  not  have  been  made.  And  not  merely  the  high  rate,  but 
other  inducements  also.  Patriotic  sentiment  caused  people  to 
save  and  to  invest  in  government  securities.  Such  is  likely  to  be 
the  case  most  of  all  when  an  entire  nation  is  stirred  by  a  feeling 
that  its  existence  is  at  stake;  as  during  our  own  Civil  War,  and  in 
almost  all  countries  during  the  great  struggle  of  1914-1918.  So 
far  as  savings  are  stimulated  by  the  very  conditions  of  the  crisis 
—  by  high  interest  and  by  patriotic  feeling  —  they  are  not  with- 
drawn from  productive  use.  They  simply  add  to  the  investments 
of  the  buyers  of  the  public  securities  and  swell  for  an  indefinite 
period  the  capital  in  terms  of  money  on  which  interest  is  regu- 
larly paid. 

War  loans  and  public  debts  have  further  consequences.  They 
not  only  raise  the  rate  of  interest,  often  for  a  long  time;  they 
cause  the  supply  of  real  capital  to  be  less,  for  periods  longer  or 
shorter  according  to  the  duration  of  the  strain.  At  the  seat  of 
fighting  there  is  immediate  and  often  frightful  destruction.  Else- 
where, factories  are  pushed  to  their  utmost,  and  raw  mate- 
rials of  every  kind  are  used  up  at  a  prodigious  rate.  Repair  and 
replacement  are  reduced  to  a  minimum.  No  new  plant  is  con- 
structed, except  when  needed  for  military  purposes,  and  what  is 
constructed  for  such  purposes  usually  proves  unsatisfactory  for 
the  uses  of  peace.  If  indeed  the  war  does  not  last  very  long, 
the  gaps  in  capital  may  be  filled  quickly  and  easily.  A  prolonged 
and  exhausting  struggle  is  followed  by  a  period  of  suffering  and 
readjustment,  the  more  trying  if  accompanied,  as  usually  it  is,  by 
monetary  derangement. 

Once  the  war  is  over  and  borrowing  ceases,  the  war  debt  means 


40-§2]  INTEREST,  FURTHER  CONSIDERED  39 

in  the  main  a  continuing  series  of  cross-payments  within  the  com- 
munity. It  means  this  in  the  main,  not  always  or  necessarily. 
So  far  as  the  debt  has  been  incurred  abroad,  payment  of  interest 
must  be  made  to  foreigners,  and  eventually  (according  as  the 
terms  of  the  loan  may  be)  repayment  of  the  principal  also.  The 
effects  of  such  transactions  on  international  trade  have  already 
been  considered.  There  is  here  a  real  drain  on  the  country's  re- 
sources. The  situation  is  different  so  far  as  interest  and  princi- 
pal are  payable  within  the  country.  Interest  charges  and  repay-  ^/j^ 
ments  of  principal  then  bring  no  net  loss,  no  net  gain. 

People  often  speak  of  a  national  debt  as  a  crushing  burden. 
But  the  payment  of  interest  on  the  debt  means  simply  that  taxes 
are  levied  and  the  proceeds  paid  to  the  holders  of  the  govern- 
ment securities.  One  set  of  persons  are  called  on  by  the  gov- 
ernment to  make  payments  to  another  set.  The  process  may 
involve  hardship,  even  injustice.  If  the  taxes  are  paid  predomi- 
nantly by  the  poor  —  if  for  example  they  are  taxes  on  commodi- 
ties of  everyday  consumption,  such  as  sugar,  salt,  tea,  coffee,  to-  ' "  *^ 
bacco  —  and  if  the  holders  of  the  public  securities  are  chiefly  the  '•'^*^ 
well-to-do  and  rich,  the  result  will  be  an  accentuation  of  inequal-  j-^>-^ 
ity.  Such  was  the  consequence  of  the  methods  of  finance  and  -^'"^ 
taxation  that  were  common  until  very  modern  times.  Of  late, 
and  markedly  during  the  war  of  1914-1918,  the  outcome  has  been 
different.  Income  taxes  and  similar  levies  bearing  chiefly  on  the 
prosperous  classes  have  been  used  to  meet  the  debt  charges.  This 
was  strikingly  the  case  in  the  financial  operations  of  Great  Britain 
and  the  United  States  during  and  after  the  Great  War.  So  far  as 
the  same  classes  are  also  holders  of  the  public  debt  (and  they  are 
the  holders  of  by  far  the  greatest  part  of  it)  the  process  is  in  es- 
sentials that  of  shifting  cash  from  one  pocket  to  another  of  the 
same  sort.  No  doubt  those  among  the  well-to-do  who  hold  a 
large  proportionate  share  of  the  war  bonds  get  a  net  balance  in 
the  way  of  interest.  Those  on  the  other  hand  whose  incomes  are 
high  and  who  hold  comparatively  few  bonds,  pay  more  in  the  way 
of  income  tax  than  they  receive  in  the  way  of  interest. 

It  must  be  said,  however,  that  this  sort  of  cool  weighing  of  the 


40  THE  DISTRIBUTION  OF  WEALTH  [40-§  3 

real  effects  of  loans  and  interest  plays  little  part  in  the  thinking 
of  the  ordinary  bondholder  and  the  ordinary  taxpayer.  Almost 
all  people  have  a  feeling  that  a  tax  is  a  net  loss,  an  interest  re-_ 
ceipt^  net  gain.  They  regard  a  tax  as  an  unwelcome  net  burden. 
Let  it  be  assumed,  for  example,  that  in  a  situation  such  as  that 
outlined  in  the  preceding  paragraphs,  the  amount  of  interest  pay- 
able to  each  taxpayer  is  exactly  the  same  as  the  amount  of  in- 
come tax  payable  by  him.  Then  there  is  no  loss  to  anyone,  no 
gain.^  Yet  most  taxpayers  would  probably  feel  that  they  were 
burdened.  They  would  regard  the  interest  receipt  as  a  natural, 
proper,  satisfactory  income;  the  tax  payment  as  unnatural,  un- 
welcome, irritating.  And  if  some  taxpayers  received  less  in  inter- 
est than  they  paid  out  in  taxes,  they  would  be  even  more  ag- 
grieved; whereas  if  the  interest  receipts  of  others  exceeded  their 
taxes,  they  would  not  be  at  all  correspondingly  mollified.  This 
state  of  mind  is  quite  absurd  and  quite  inevitable.  It  is  the 
natural  result  of  the  attitude  of  the  whole  world  toward  taxation 
and  the  government's  doings,  toward  property  and  the  income 
from  property. 

§3.  Another  form  of  savings  used  in  investment  stands  mid- 
way between  those  for  production  in  the  stricter  sense  and  those 
for  consumption.  This  is  investment  in  durable  goods  suited  for 
immediate  use,  of  which  dwelling  houses  let  for  hire  are  the  most 
important  type. 

The  hiring  of  a  dwelling  brings  about  an  exchange  of  present 
means  for  future  means,  and  the  emergence  of  a  premium,  in  es- 
sentially the  same  way  as  in  the  simplest  loan  at  interest.  The 
tenant  normally  pays  as  rental  a  sum  sufficient  to  reimburse  the 
owner  or  landlord  for  repairs,  depreciation,  and  such  charges  as 
insurance  and  taxes;  and  he  pays  him  in  addition  a  sum  which 
constitutes  a  net  income  to  the  landlord  and  which  is  the  interest 
on  his  investment.    (We  leave  out  of  consideration  for  the  present 

*  Of  course,  there  will  be  the  expense  of  collecting  the  taxes  and  distributing  the 
interest ;  a  real  burden,  of  which  the  concrete  form  is  that  government  officials  are 
engaged  in  this  task  when  they  might  be  engaged  on  work  of  more  substantial  aer- 
viceableness.  Expenses  of  collection  and  administration,  however,  are  a,  email 
fraction  of  the  total^Buma  involved. 


40-§3]  INTEREST,  FURTHER  CONSIDERED  41 

the  land  on  which  the  dwelHng  stands;  its  relation  to  the  gross 
rental  will  be  considered  in  the  next  following  chapters.)  The 
landlord  at  the  outset  has  present  means  or  savings  at  his  dis- 
posal —  the  sum  which  he  applies  to  building  the  house.  If  the 
rental  which  he  receives  were  just  enough  to  bring  him  back  this 
same  sum,  covering  the  eventual  return  of  his  capital  (as  well  as 
repairs  and  other  current  charges),  he  would  get  from  the  tenant 
or  series  of  tenants  precisely  what  he  gave.  But  this  return  is 
spread,  by  installments,  over  a  long  time.  We  may  suppose  the 
house,  for  example,  to  last  fifty  years,  being  worn  out  and  useless 
at  the  end  of  that  time.  The  full  repa\Taent  of  the  capital  sum 
will  then  be  completed  only  after  the  lapse  of  half  a  century.  A 
postponement  of  satisfactions  on  the  landlord's  part  is  necessar- 
ily involved,  and  will  not  be  accepted  unless  there  is  some  induce- 
ment —  unless  the  tenant  pays  more  than  enough  to  repay  the 
sum  originally  invested ;  that  is,  unless  interest  is  paid. 

Where  a  building,  or  indeed  any  other  concrete  form  of  wealth, 
is  expected  to  last  a  very  long  time,  depreciation  (that  is,  the 
gradual  recovery  of  the  capital  sum  invested)  plays  but  a  small 
part,  and  the  rental,  over  and  above  repairs  and  expenses,  is 
made  up  almost  solely  of  the  interest  charge.  Strictly,  the  in- 
vestor should  always  face  the  fact  of  depreciation.  Tho  some 
forms  of  durable  consumer's  wealth,  like  a  few  forms  of  pro- 
ducer's wealth,  seem  to  endure  indefinitely,  decay  and  deprecia- 
tion eventually  set  in.  In  many  cases  of  such  investments,  how- 
ever, it  is  probable  that  the  distant  future  when  the  capital  sum 
will  finally  have  to  be  replaced  is  forgotten.  The  landlord  in  his 
calculations  of  rentals  will  often  reckon  merely  on  interest;  with 
allowance  for  repairs  and  other  expenses,  but  without  allowance 
for  the  ultimate  replacing  of  the  initial  investment.  In  regions 
where  population  is  growing,  this  sort  of  real  or  apparent  miscal- 
culation is  fostered  by  the  expectation  that  a  rise  in  the  value  of 
the  land  will  ofi'set  the  depreciation  of  the  building  —  a  phase  of 
the  subject  which  is  reserved  for  later  consideration. 

Turning  now  from  the  conditions  of  supply  to  those  of  demand, 
we  find  a  situation  less  complex  than  that  as  to  the  demand  for 


42  THE  DISTRIBUTION  OF  WEALTH  [40-§  3 

producer's  capital.  The  demand  for  house  room  and  the  like  is 
similar  to  that  for  other  present  satisfactions.  House  room  is  con- 
stantly compared  with  other  utilities  and  exhibits  the  same  grada- 
tions of  demand.  The  dwelling  yields  shelter  and  it  may  satisfy 
the  love  of  beauty.  It  ministers  also  in  no  small  degree  to  the 
love  of  distinction;  for  here  is  one  of  the  most  familiar  forms  of 
display.  The  more  of  these  gratifications  are  offered,  the  lower 
will  be  their  marginal  vendibility  and  their  price.  Suppose  that 
dwellings  were  the  only  available  form  of  investment,  and  that  all 
the  sums  saved  were  turned  into  this  channel;  we  may  reason 
that,  as  a  steadily  increasing  supply  of  such  sources  of  satisfaction 
was  offered,  the  amounts  which  purchasers  would  pay  for  suc- 
cessive installments  of  them  would  grow  less.  Still  supposing 
them  to  be  the  only  form  of  investment,  we  may  reason  further 
that  the  decline  in  rentals  would  not  cease  until  investors  (those 
building  dwellings  for  hire)  came  to  the  conclusion  that  it  was  no 
longer  worth  while  to  abstain  from  the  present  use  of  their  means 
in  the  process  of  providing  house  room  for  tenants;  or,  to  speak 
more  carefully,  when  the  last  or  marginal  investor  came  to  this 
conclusion.  The  case  would  again  be  one  of  the  equilibrium  of 
supply  and  demand. 

Other  forms  of  consumer's  wealth  present  the  same  phenome- 
non. Pianos,  the  furniture  in  lodgings,  theatrical  costumes  and 
fancy  dress,  carriages  for  hire  —  all  illustrate  the  principle.  Wear 
and  tear,  -and  allowance  for  depreciation,  play  a  larger  part  in 
these  than  in  dwellings,  and  interest  forms  a  smaller  proportion 
of  the  gross  rental.  The  civilized  man's  repugnance  to  miscel- 
laneous and  indiscriminate  use  of  his  possessions  sets  limits  to  the 
spread  of  such  hiring  and  letting;  but  anything  which  by  custom 
can  be  passed  readily  from  one  person  to  another,  like  a  dwelling 
or  a  piano,  may  cause  a  return  to  arise  in  the  way  of  an  interest 
payment. 

Consumer's  wealth  of  a  durable  and  transferable  kind  thus  of- 
fers still  another  way  of  investing  present  means  and  of  securing 
an  interest  return.  The  whole  mass  of  savings  put  aside  for  in- 
vestment is  to  be  compared  with  all  the  opportunities  for  utilizing 


4(>-§4]  INTEREST,  FURTHER  CONSIDERED  43 

them  —  in  production,  in  loans  for  consumption,  in  consumer's 
capital.    These  combine  to  make  up  the  total  demand  which  is  to 

Hbe  set  against  the  supply  of  savings.  No  one  of  the  various  op- 
portunities can  be  said  to  dominate  the  others,  so  far  as  the  rate 
of  interest  is  concerned.  But  they  are  by  no  means  of  equal 
quantitative  importance.  Except  for  public  borrowings,  loans  of 
the  spendthrift  type  are  comparatively  small  in  modern  com- 
munities. Durable  forms  of  consumer's  wealth,  of  which  dwell- 
ings are  typical,  present  a  much  ampler  and  steadier  opportunity 
for  the  investment  of  savings;  one  which  enlarges  steadily  with 
an  increase  in  population  and  in  general  prosperity.  The  opera- 
tions of  production,  and  the  possibility  of  increasing  the  efficiency 
of  labor  by  applying  it  over  time,  form  the  most  important  open- 
ing of  all.  In  this  sense,  loans  for  production  may  be  said  to 
dominate  the  market  and  to  settle  the  return  to  all  kinds  of  capi- 
tal and  investment. 

§  4.  We  are  now  prepared  to  give  an  answer  to  a  set  of  ques- 
tions suggested  at  an  earlier  stage,  which  have  to  do  with  the 
relation  of  producer's  wealth  to  consumer's  wealth,  and  the  defi- 
nition of  capital.^  Matters  of  definition,  tho  not  in  themselves  of 
the  first  importance,  yet  repay  discussion^  because  they  compel 
reflection  on  the  essentials  of  the  things  defined. 

Producer's  wealth  and  consumer's  wealth  are  similar,  in  that 

Jthey  are. both Jnstruments.  Both  serve  to  provide  utilities  or 
gratifications.  They  differ_as  to  the  time  at  wliich  the  utilities 
will  emerge.  P^educer's  wealth  brings  no  utilities  in  the  present; 
all  of  its  effects  are  to  appear  in  the  future.  Consumer's  wealth 
brings  utilities  in  the  present.  But  not  all  of  its  utilities  are  so 
brought.  It  sheds  them,  to  so  speak,  continuously  thruout  its 
existence.  The  longer  it  lasts,  the  longer  will  the  process  con- 
tinue. Some  of  its  utilities  are  thus  also  future;  and  the  more  of 
them  in  proportion  as  it  is  durable. 

The  most  general  statement  of  the  conditions  under  which  in- 
terest arises  is  that  it  results  from  an  exchange  of  present  things 
for  tilings  future.    This  proposition,  more  or  less  foreshadowed  in 
» See  Chapter  5,  §  2. 


44  THE  DISTRIBUTION  OF  WEALTH  [40- §  5 

the  discussions  of  a  long  series  of  economists,  and  sharply  formu- 
lated late  in  the  nineteenth  century  by  the  brilliant  Austrian 
economist,  Bohm-Bawerk,  applies  to  all  the  various  operations  in 
which  a  surplus  appears  for  him  who  makes  loans  or  advances. 
It  applies  no  less  to  operations  which  involve  consumer's  wealth 
than  to  those  which  involve  producer's  wealth.  From  this  point 
of  view  the  one  is  capital  as  much  as  the  other.  In  both  cases 
true  interest  arises,  due  to  the  fact  that  the  present  ordinarily 
outweighs  the  future  in  attractiveness,  and  that  those  who  have 
present  means  at  command  will  not  postpone  enjoyment  of  them 
unless  some  inducement  in  the  shape  of  premium  is  offered.  So 
far  as  the  problems  of  distribution  are  concerned,  consumer's 
wealth  and  producer's  wealth  thus  present  similar  phenomena. 
Either  of  them  may  fetch  interest  and  so  lead  to  the  emergence  of 
a  set  of  persons  who  have  an  income  from  accumulated  means  and 
who  need  not  work  for  their  living  —  a  leisure  class. 

Tho  thus  similar  in  the  essential  relations  of  present  to  future, 
the  two  forms  of  wealth  yet  present  differences  in  other  respects. 
There  is  an  obvious  difference  in  the  nature  of  the  social  advan- 
tage secured  from  the  possession  of  present  means.  That  advan- 
tage, in  the  case  of  producer's  wealth,  is  found  in  the  increase  in 
the  productiveness  of  labor  because  it  is  applied  in  the  "capital- 
istic" way.  The  demand  for  producer's  capital  and  the  ability 
of  the  users  of  capital  to  pay  interest  depend  on  factors  which  do 
not  bear  on  consumer's  capital  or  on  interest  derived  from  con- 
sumer's capital.  The  progress  of  invention,  the  growing  effective- 
ness of  larger  plant  and  more  costly  tools,  the  possible  limits  to 
the  increase  in  output  from  more  laborious  preparation  —  all 
these  are  questions  which  must  be  considered  with  reference  to 
capital  in  the  narrower  sense,  and  do  not  present  themselves  as  to 
consumer's  wealth. 

§  5.  When  once  the  payment  of  interest  is  a  familiar  and  ac- 
cepted fact,  it  is  extended  to  all  cases  where  present  means  are  in 
one  person's  hand  and  are  turned  over  to  another  person.  He 
who  has  money  to  lend  can  always  get  interest  on  it.  He  who 
borrows  must  pay  for  the  veriest  fraction  advanced  to  him  and 


40-§6]  INTEREST,  FURTHER  CONSIDERED  45 

for  every  day  of  the  advance.  The  competition  and  interaction 
of  a  highly  developed  banking  and  credit  system  is  always  keep- 
ing the  possessor  of  present  means  in  connection  with  those  who 
are  the  eventual  users  of  capital  and  the  ultimate  employers  of 
labor;  and  interest  can  be  continuously  and  unfailingly  secured  on 
every  scrap  of  disposable  cash. 

Here,  as  in  so  many  fields  of  economic  activity,  the  persons  di- 
rectly engaged  are  little  aware  of  the  significance  of  their  doings. 
The  professional  money  lender  knows  by  everyday  experience 
that  he  can  always  get  interest  on  the  money  he  has  to  lend,  and 
he  commonly  thinks  of  it  as  "earning"  interest.  He  who  bor- 
rows accepts  the  need  of  paying  interest  as  a  necessary  part  of 
the  world  as  it  is,  and  does  not  stop  to  think  that  his  own  de- 
mand for  present  means  —  in  order,  say,  to  buy  a  machine  or  a 
batch  of  materials  or  wares  —  is  part  of  the  very  situation  that 
causes  a  return  to  the  lender  to  arise.  Just  as,  under  the  division 
of  labor,  each  individual  worker  has  no  consciousness  of  the  part 
he  plays  in  the  complex  organization  of  industry;  just  as,  in  the 
adjustment  of  foreign  trade,  each  merchant  has  no  notion  of  his 
place  in  the  mechanism  —  so  neither  individual  lenders  nor  indi- 
vidual borrowers  have  insight  into  the  conditions  which  underlie 
their  bargainings.  Economists  are  often  twitted  with  being  theo- 
retical and  out  of  touch  with  the  facts  of  industry.  Much  more 
unpractical  is  the  attitude  of  the  average  business  man,  who  is 
familiar  with  but  one  small  corner  of  the  industrial  world,  con- 
tents himself  with  the  most  superficial  commonplaces,  and  knows 
so  little  of  the  essential  problems  of  economics  that  he  is  hardly 
aware  even  of  their  existence. 

§  6.  The  minimum  rate  of  interest,  on  the  best  security,  differs 
a  little  between  different  countries.  For  generations  it  was  low- 
est in  England  and  sensibly  higher  in  France.  Until  the  close  of 
the  nineteenth  century,  it  was  higher  in  the  United  States  than  in 
most  European  countries.  As  a  rule,  it  is  higher  in  new,  prosper- 
ous, and  rapidly  growing  countries;  lower  in  old  countries  that 
Tiave  long  been  prosperous.  The  explanation  is  mainly  to  be  found 
in  the  varying  conditions  of  supply  and  demand,  in  the  race  be- 


^ 


46  THE  DISTRIBUTION  OF  WEALTH  [40-§  6 

tween  accumulation  and  improvements.  In  a  country  like  Eng- 
land, which  enjoyed  complete  internal  peace  and  high  industrial 
prosperity  for  two  centuries,  accumulation  was  steadily  great 
and,  notwithstanding  the  periodic  sweeping  away  of  large  amounts 
thru  loans  for  war  expenditure,  there  was  almost  constant  pres- 
sure to  find  advantageous  employment.  France  enjoyed  similar 
prosperity  only  after  the  close  of  the  Napoleonic  wars,  and,  tho 
long  a  rich  country,  never  had  such  an  overflowing  supply  as 
England.  Moreover,  her  huge  public  debt  withdrew  from  pro- 
ductive use  a  larger  part  of  her  people's  savings.  From  both 
countries  there  was  an  outflow  of  money  means  for  several  gener- 

^,      ations,  thru  investments  in  countries  where  the  demand  for  use 
in  production  was  great.     Germany,  whose  industrial  advance 
^  ^after  1870  was  extraordinary,  also  reached  the  stage  of  fast  accumu- 

*^  lating  resources,  and  of  overflow  to  other  countries.  From  all 
these  the  outflow  was  chiefly  to  the  newer  countries,  whose  own 
accumulations  were  not  yet  great,  whose  resources  were  still  not 
fully  utilized,  and  whose  opportunities  for  using  capital  were  large 
and  profitable.  Such  was  the  United  States  thruout  the  nine- 
teenth century.  Canada,  Australia,  South  Africa,  Argentina, 
Chili,  and  other  regions  offered  advantageous  fields  for  invest- 
ments from  older  countries.  Not  the  least  striking  transfer  of  ac- 
cumulations was  that  from  the  older  part  of  the  United  States, 
along  the  North  Atlantic  coast,  to  the  West  and  latterly  to  the 
South  of  the  country.  From  New  England  a  steady  stream  of 
savings  flowed  to  the  West,  and  enabled  the  latter  section  to 
provide  itself  with  much-needed  capital. 

If  the  transfer  of  savings  from  one  country  to  another  took 
place  without  question  or  hesitancy,  the  rate  of  return  on  invest- 
ments would  be  the  same  in  both.  But  it  does  not  so  take  place. 
A  loan  to  a  person  at  home,  or  for  use  in  an  enterprise  at  home, 
is  made  more  readily  than  one  to  a  strange  country.  Something 
extra  must  be  paid  by  the  borrower  who  has  to  deal  with  a  lender 
on  the  other  side  of  a  political  boundary.  Even  where  no  political 
boundary  has  to  be  crossed,  but  only  a  less  familiar  region  entered, 
the  same  sort  of  inducement  must  usually  be  offered;  as  when  an 


^r 


4(>-§6]  INTEREST,  FURTHER  CONSIDERED  47 

Englishman  is  asked  to  lend  in  Canada  or  Australia,  or  a  New 
Englander  in  Texas  or  Oregon.  If  the  only  supply  in  new  and 
rapidly  growing  regions  were  that  from  their  own  savers,  the  rate 
of  return  there  would  be  considerably  higher  than  in  fact  it  is. 
The  inflow  from  older  countries  brings  it  down,  tho  not  to  a  rate 
as  low  as  that  prevailing  in  those  older  countries. 

The  same  sort  of  difference  arises  between  familiar  and  unfa- 
miliar investments  within  the  same  country  and  region.  A  large 
city  like  Boston  and  New  York  can  borrow  on  better  terms  than 
a  small  town  or  municipality,  even  tho  the  latter  be  as  near  and 
as  solvent.  A  large  railway  corporation,  whose  securities  are 
known  favorably  to  a  wide  circle  of  investors,  can  sell  its  bonds 
(that  is,  contract  its  loans)  more  advantageously  than  a  modest 
enterprise,  even  tho  the  latter  be  no  less  secure.  The  activity  of 
bankers  and  traders  and  the  publicity  given  by  stock  exchanges 
tend  to  lessen  differences  of  this  kind,  as  they  do  those  between 
countries ;  but  some  differences  still  persist. 

In  ail  this  process  of  transfer,  and  tendency  to  equality  with- 
out the  attainment  of  complete  equality,  account  must  be  taken 
of  risk.  Investments  in  a  new  country,  promising  as  they  may 
be  and  likely  to  yield  in  the  end  returns  larger  than  in  old  coun- 
tries, often  contain  elements  of  uncertainty  in  each  individual 
case.  Hence  something  in  the  nature  of  an  insurance  premium 
must  be  paid. 

Unattractiveness  tends  to  keep  high  the  returns  from  some 
forms  of  lending.  Pawnbrokers'  loans  arc  usually  made,  as  has 
already  been  remarked,  under  circumstances  which  prevent  the 
full  effect  of  competition  from  being  felt.  But  even  if  made  at 
rates  resulting  from  complete  knowledge  of  market  possibilities 
by  borrowers,  they  would  doubtless  be  higher  than  ordinary  loans; 
since  such  lendings  are  not  in  social  esteem.  Similarly,  dwellings 
and  tenements  let  to  the  poor  commonly  yield  a  return  higher 
than  the  current  rate,  even  after  allowing  for  the  risks  of  non- 
payment and  the  considerable  expenses  of  management  and  col- 
lection. There  is  an  aversion  to  dealings  that  involve  real  or  seem- 
ing pressure  on  the  necessitous.    Tho  "philanthropy  at  four  per 


48  THE  DISTRIBUTION  OF  WEALTH  [40-§  7 

cent"  has  caused  model  dwellings  in  cities  to  be  offered  to  the 
poor  at  rentals  that  yield  the  owners  no  more  —  possibly  a  shade 
less  —  than  could  be  secured  in  other  ways,  such  operations  have 
reached  but  a  small  part  of  the  field,  and  it  still  remains  true  that 
investments  of  this  kind  ordinarily  secure  a  return  above  the  cur- 
rent rate.  For  reasons  of  the  same  kind,  business  premises  used 
in  American  cities  for  the  retail  sale  of  liquor  secured  an  unusual 
return :   a  certain  discredit  attached  to  this  sort  of  investment. 

§7.  What  can  be  said,  in  conclusion,  of  the  justification  and 
social  significance  of  interest? 

In  the  older  English  books  on  economics,  interest  was  often 
said  to  be  the  "reward  of  abstinence."  The  phrase  has  often 
been  ridiculed:  a  Rothschild  or  a  Vanderbilt  abstains  and  deserves 
a  reward!  The  clear-headed  among  the  older  economists  prob- 
ably never  had  in  mind  a  moral  connotation  in  the  phrase,  tho 
those  who  tried  to  popularize  their  theories  often  did.  The  phrase 
simply  tried  to  state  a  fact:  that  interest  arises  because  the  ac- 
cumulation of  savings  and  the  making  of  capital  involve  "absti- 
nence." The  way  in  which  the  present  means  were  secured  by 
the  person  now  possessing  them  has  nothing  to  do  with  the  ques- 
tion of  saving  and  abstinence.  He  may  have  got  them  by  swin- 
dling or  robbery;  or  he  may  have  got  them  by  the  exercise  of  pro- 
ductive faculties  in  ways  advantageous  to  his  fellowmen.  The 
act  of  saving  from  such  means,  again,  may  be  of  a  kind  deemed 
meritorious,  as  for  example  if  it  is  to  provide  for  wife  and  chil- 
dren; or  it  may  be  an  idle  heaping  up  from  superfluous  income, 
animated  only  by  senseless  rivalry  in  money-making.  It  is  all 
one,  so  far  as  concerns  the  strictly  economic  theorem.  The  es- 
sence of  this  is  that  present  possession  is  preferred  to  future,  and 
that  present  resources  will  not  be  exchanged  for  future  resources 
unless  some  inducement  be  offered.  Here  is  a  cold  fact;  whether 
it  squares  with  moral  desert  is  quite  a  different  matter. 

Interest  seems  to  be  an  inevitable  outcome  of  the  system  of 
private  property  and  free  exchange.  It  appears  in  early  and  sim- 
ple societies,  and  grows  in  volume  and  importance  with  the 
greater  complication  and  eflficiency  of  the  processes  of  production. 


40-§7]  INTEREST,  FURTHER  CONSIDERED  49 

At  the  outset  it  arises  chiefly  in  the  simple  form  of  loans  for  con- 
sumption. With  the  development  of  our  modern  communities, 
loans  for  production  have  come  to  play  a  greater  and  greater 
part,  until  now  they  are  the  dominating  form.  As  we  survey  the 
tangled  course  of  economic  history,  it  is  impossible  to  see  how  the 
private  accumulation  of  capital  under  the  stimulus  of  interest 
could  have  been  dispensed  with.  In  so  far,  it  may  be  adjudged 
to  be  just. 

On  other  than  this  simplest  utilitarian  ground,  however,  there 
is  a  case  against  interest,  resting  on  the  fact  of  inequality.  Those 
who  have  saved  and  put  aside  present  means  usually  have  had 
ample  means.  Saving  may  have  been  a  sacrifice,  in  the  sense  that 
postponement  of  present  enjoyment  is  commonly  irksome;  but  it- 
has  not  commonly  been  an  onerous  sacrifice.  Until  within  recent 
times  accumulation  and  investment  were  possible  only  for  a  very 
small  circle  of  persons,  who  by  fair  means  or  foul  had  got  an  in- 
come much  above  that  of  the  rest.  The  beginnings  of  modern 
capitalism  are  not  known  with  any  certainty,  but  it  is  clear  that 
in  its  earliest  stages  and  for  many  centuries  but  a  small  knot  of 
persons  —  traders,  bankers,  city  folk  of  unusual  prosperity  — 
had  any  part  in  accumulation  and  investment.  Tho  this  situa- 
tion is  somewhat  modified  in  our  own  day  by  savings  banks,  life 
insurance  companies,  cooperative  societies,  and  all  the  multiplied 
openings  for  investment  by  the  masses,  it  remains  true  that  most 
saving  is  done  by  the  well-to-do  and  the  rich.  There  is  no  sta- 
tistical evidence  to  prove  this  with  certainty,  but  such  evidence  is 
not  necessary.  Observation  of  the  familiar  facts  makes  it  plain 
that  accumulation  and  investment  are  now  matters  of  steady  con- 
cern chiefly  for  the  small  circle  of  persons  who  are  already  mem- 
bers of  the  possessing  classes  or  in  close  association  with  them. 

Interest-yielding  property,  thus  the  outcome  of  inequality,  it- 
self promotes  and  maintains  inequality.  Not  only  are  those  who 
receive  it  put  in  possession  of  greater  present  means,  but,  what  is 
more  important,  thej'^  are  enabled  to  perpetuate  their  own  and 
their  children's  favored  position  as  earners  of  income.  The  social 
stratification  of  our  time,  the  separation  of  the  well-to-do  classes 


50  THE  DISTRIBUTION  OF  WEALTH  [40- §7 

from  the  nonpossessing,  is  supported  and  strengthened  by  the  in- 
come from  existing  possessions.  The  leisure  class  has  emerged  as 
the  consequence  of  interest  and  tends  to  perpetuate  itself  and  en- 
large itself  thru  the  receipt  of  interest. 

To  repeat,  then,  interest  is  an  inevitable  outcome  of  private 
property.  The  whole  course  of  modern  industrial  development 
has  taken  place  under  that  system.  We  cannot  perceive  that  it 
could  have  taken  place  otherwise.  The  phenomenon  of  the 
leism-e  class  has  never  been  a  self-justifying  one  for  the  unbiassed 
observer.  It  must  be  accepted  as  part  of  a  system  beneficial  on 
the  whole,  and  at  all  events  indispensable;  indispensable,  that  is, 
in  the  past  and  for  the  visible  future.  Whether  private  property 
and  all  that  hangs  thereby  will  last  into  the  indefinite  future 
raises  questions  which  are  much  wider  than  those  directly  con- 
nected with  interest,  and  must  be  reserved  for  discussion  at  a 
later  stage.^ 

1  Compare  what  is  said  below,  in  Chapter  55,  on  Inequality  and  Its  Causes,  and 
in  Chapters  66  and  67,  on  Socialism. 


iv 


^^, 


Overproduction  and  Ovebji^t'^'i 


ESTMENT 


Section  1.  Overproduction,  in  the  sense  of  excess  beyond  the  possibility  of 
use,  is  impossible.  The  extensibility  of  wants,  51  —  Sec.  2.  Overpro- 
duction, in  the  sense  of  production  beyond  the  stage  of  profit,  is  possible 
if  investment  proceeds  unendingly.  The  process  of  advances  to  laborers 
and  the  readjustment  of  production  under  the  supposed  conditions. 
Check  to  the  extreme  results,  from  the  cessation  of  accumulation.  The 
reasoning  of  Rodbertus  criticized,  53  — ■  Sec.  3.  A  real  tendency  to  over- 
production, thru  overinvestment  in  the  familiar  industries,  58  —  Sec.  4. 
Industries  with  large  plants,  best  managed  under  continuity  of  operation, 
are  tempted  to  overproduction  or  else  to  combination,  59  —  Sec.  5.  The 
phenomena  of  crises  and  industrial  depression  are  in  reality  different  from 
those  of  overproduction,  60. 

§1.  The  present  chapter,  is  in,  part  a  digression.  The  subject 
of  overproduction  runs  across  more  than  one  part  of  economic 
theory.  It  is  connected  with  problems  of  production  and  of  value 
as  well  as  with  those  of  distribution.  The  usual  reasoning  about 
it  touches  more  especially  on  the  possibility  of  overinvestment, 
and  so  on  the  determination  of  the  return  to  capital.  Hence 
it  is  conveniently  taken  up  at  this  point. 

"Overproduction"  may  mean  various  things,  and  the  question 
whether  there  can  be  overproduction  is  accordingh'  to  be  answered 
in  various  ways.  ►  Let  us  consider  first  the  widest  use  of  the  term : 
general  overproduction  beyond  what  man  can  use.  Is  such  a 
thing  possible? 

The  negative  answer  commonly  given  by  economists  rests  on 
the  extensibility  of  human  wants.  It  is  true  that  the  bare  physical 
needs  of  man  for  food,  clothing,  and  shelter  are  satisfied  with 
comparatively  little.  If,  with  a  possibility  of  further  supplies, 
only  more  of  plain  food,  simple  clothing,  dry  shelter  were  added, 
there  would  soon  be  an  excess  beyond  men's  wants.  But  by 
varying  the  supplies,  satisfaction  can  be  added  almost  indefinitely. 

51 


52  THE  DISTRIBUTION  OF  WEALTH  [41- §1 

Refine  the  food,  elaborate  and  vary  the  clothes  and  the  house, 
and  there  seems  to  be  no  limit  to  what  can  be  enjoyed.  As  Adam 
Smith  remarked,  "the  desire  for  food  is  limited  in  every  man  by 
the  narrow  capacity  of  the  hmnan  stomach;  but  the  desire  of  the 
conveniences  and  ornaments  of  building,  dress,  equipage,  ancT^-^ 
household  furniture  seems  to  have  no  limit  or  certain  boundary."  i 
Nothing  is  more  extraordinary  than  the  ease  with  which  a  man 
who  begins  with  a  small  income  and  modest  enjoyments,  accom- 
modates himself  to  larger  means,  finds  new  openings  for  expendi- 
ture which  soon  crystallize  into  "needs,"  and  complains  of  a  "high 
cost  of  living"  which  merely  reflects  his  own  habituation  to  grow- 
ing comfort  and  luxury.  All  this.is  the  result  of  variety  —  thru 
the  stimulation  of  new  wants  and  the  discovery  of  new  ways  of 
satisfying  them.  The  great  increase  of  productive  power  during 
the  last  century  or  two  has  meant  necessarily  a  diversification  of 
industry  and  a  constant  resort  to  new  things  or  new  refinements 
of  things  familiar.  Many  articles  which  were  formerly  luxuries  are 
now  everyday  comforts;  and  many  which  were  formerly  com- 
forts are  now  deemed  necessaries. 

It  is  true  that  one  of  the  wants  to  whose  satisfaction  additional 
means  are  turned  is  the  mere  love  of  distinction.  Many  things 
are  valued,  partly  or  wholly,  for  the  simple  reason  that  they  are 
symbols  of  supposedly  higher  social  station  —  evening  dress, 
motor  cars  and  carriages,  lavish  entertainment,  yachts,  palaces. 
The  expenditure  for  these  is  perhaps  waste :  waste,  that  is,  in  the 
sense  that  the  satisfaction  from  them  is  elusive.  On  the  other 
hand  this  very  satisfaction,  resting  on  the  instincts  of  emulation 
and  ostentation,  is  one  of  the  most  universal  in  mankind  and  has 
been  a  powerful  stimulant  to  productive  activity.  So  far  as  the 
problem  of  overproduction  is  concerned,  it  matters  not  how 
great  or  enduring  is  the  enjoyment  secured,  how  far  propor- 
tionate to  the  expenditure  involved.  It  suffices  that  as  in  fact 
men  are,  their  wants  of  all  kinds  are  indefinitely  extensible  — 
for  physical  comfort,  for  aesthetic  and  intellectual  gratification, 

1  Wealth  of  Nations,  Book  I,  Chapter  11,  Part  II;  Vol.  I,  p.  165  of  Cannan'a 
edition. 


41-§2]    OVERPRODUCTION  AND  OVERINVESTMENT  53 

for  variety  and  amusement,  for  ostentation  and  display.  There 
is  no  danger  of  producing  more  than  they  will  at  least  think  they 
want. 

This  general  statement  needs  some  qualification  as  regards  men 
of  other  races  and  climes  than  those  of  Europe  and  America. 
There  are  men  whose  wants  are  not  extensible,  or  at  least  expand 
slowly  and  sluggishly.  Negroes  and  others  in  the  tropics,  when 
they  have  enough  to  eat  and  drink,  prefer  lolling  in  idleness  to 
further  work  for  the  satisfaction  of  tastes  which  we  consider 
refined,  or,  at  all  events,  civilizing.  They  irritate  the  modern 
business  man,  when  he  strives  to  exploit  new  territories,  because 
they  cease  to  produce  when  their  elemental  wants  are  satisfied. 
He  wishes  to  stir  them  to  added  effort,  and  is  willing  to  pay  them 
for  it,  in  order  that  profit  may  emerge;  but  unless  somehow  new 
wants  are  aroused,  they  work  less,  not  more,  when  their  pay  is 
greater.  Here^  too,  overproduction,  in  a  strict  sense,  is  quite 
impossible;  these  untutored  folk  simply  cease  to  work  and  to  pro- 
duce when  they  have  had  enough. 

§2.  It  is  not  in  this  general  sense,  however,  that  "overpro- 
duction" is  commonly  spoken  of.  Trouble  arises,  it  is  contended, 
not  from  the  production  of  more  things  than  can  be  used,  but  from 
the  production  of  more  things  than  can  b^5oM  at  a  profit.  The 
difficulty,  it  is  said,  is  one  peculiar  to  our  modern  capitalistic 
society,  which  finds  itself  in  difficulties  because  of  its  very  achieve- 
ments. More  is  produced  than  can  be  disposed  of  to  the  capital- 
ists' advantage,  and  loss  ensues  from  the  very  operations  which 
were  designed  to  bring  gain. 

This  of  course  is  possible  for  any  industry  and  anj^  one  com- 
modity. It  is  entirely  conceivable  that  more  bicycles  or  more  silks 
should  be  produced  than  could  be  sold  at  a  profit.  The  case,  tho 
not  the  usual  one,  occurs  frequently  enough  to  be  entirely  familiar. 
Mistakes  and  miscalculations  will  occur.  But  the  remedy  seems 
simple  and  automatic.  If  more  is  produced  of  any  one  thing  than 
can  be  sold  on  profitable  terms,  the  production  of  that  thing  will 
be  diminished.  Sooner  or  later  —  perhaps  after  a  considerable 
interval,  if  the  operations  involve  large  plant  —  some  of  the  pro- 


-^-^^^^l^  .^v  ,^-^'.THE  DISTRIBUTION  OF  WEALTH  [41-§  2 

ducers  will  withdraw,  supply  will  lessen,  price  will  rise,  and  the 
overproduction  will  cease. 

It  is  maintained,  however,  that  this  avenue  of  escape  is  not 
available  where  all  industries  are  pressing  masses  of  goods  on  the 
market  at  the  same  time.  If  indeed  a  few  industries  only  are  pro- 
ducing beyond  the  point  of  profitable  sale,  labor  and  capital  can 
be  and  will  be  transferred  to  others  not  thus  embarrassed.  There 
is  no  such  remedy  if  those  others  are  in  the  same  quandary.  And 
the  tendency,  it  is  said,  is  for  all  industries  to  be,  if  not  perma- 
nently, at  least  recurrently  and  periodically  in  the'  stage  of  produc- 
tion beyond  the  point  of  profit.  Modern  plant  and  machinery 
pours  forth  consumable  commodities  in  huge  quantities.  True, 
while  the  machinery  is  in  the  process  of  making,  there  is  demand 
for  iron,  timber,  and  other  things  used  in  making  the  plant,  and 
there  is  profit  in  producing  them,  and  while  the  machinery  is  in 
the  first  stages  of  being  used,  there  is  demand  for  materials  like  coal, 
wool,  cotton,  and  the  like,  and  again  profit  in  producing  these. 
But  when  the  consumable  article  —  clothing,  say  —  is  finally  put 
on  the  market  in  vast  quantities,  it  cannot  be  sold  on  profitable 
terms.  There  is  overproduction,  stoppage,  and  shut-down,  reac- 
tion in  turn  on  the  making  of  plant  and  materials,  cessation  in  the 
industries  which  will  produce  these,  and  general  depression.  The 
recurrence  of  commercial  crises  is  thus  ascribed,  in  part  at  least, 

to  recurrent  overproduction. 

\(\  In  all  this  reasoning  there  is  confusion  of  two  essentially  different 
things:  on  the  one  hand,  investmeot  beyond  the  point  where  a 
return  to  capital  can  be  maintained;  bn  the  other  hand,  production 
beyond  the  point  where  a  market  for  goods  can  be  found.  The  first 
of  these  is  quite  conceivable,  tho  highly  improbable.  The  second, 
so  long  as  human  wants  remain  extensible,  is  not  conceivable. 

Let  it  be  supposed,  by  the  way  of  putting  the  problem  in  its 
extreme  form  (and  it  is  in  this  way  that  a  question  of  principle  is 
best  tested)  that  accumulation  and  investment  go  on  by  leaps  and 
bounds;  that  plant  and  machinery  are  indefinitely  multiplied,  and 
that  consumable  commodities  are  multiplied  in  proportion.  What 
course  of  events  will  ensue? 


41-§2]    OVERPRODUCTION  AND  OVERINVESTMENT  55 


/[J^rety purchasing  power  or  "money"  (to  put  it  briefly)  is  turned 
to  the  buying  of  plant  and  machinery,  and  of  materials  for  making 
these.  It  is  no  longer  turned  to  the  things  formerly  enjoyed  by 
those  who  have  become  investors.  There  is  a  cessation  or  great 
slackening  of  "luxurious  expenditure."  With  this  change  in 
demand  there  ensues  a  corresponding  change  in  the  direction  of 
production.  The  machine-making  industries  will  be  profitable 
and  the  luxury-making  industries  unprofitable.  Labor  will  be 
turned  from  the  one  to  the  other.  The  fallacy  of  supposing  that 
labor  will  be  less  employed  because  of  a  diminution  of  luxurious 
expenditure  has  been  exploded  over  and  over  again. ^  Saving  and 
investment  do  not  mean  that  labor  fails  of  employment  or  is  less 
-employed,  but  merely  that  it  is  employed  in  a  different  way. 

Before  long,  however,  the  plant  and  the  machinery  must  be  used; 
that  is,  turned  to  making  more  consumable  things.  What  sorts  of 
consumable  things  will  be  in  demand?  Not  such  as  are  adapted  to 
the  demands  of  investors  and  savers  (presumably,  the  well-to-do). 
These,  by  supposition,  no  longer  buy  for  enjoyment;  at  all  events 
they  reduce  such  expenditures  to  the  minimum.  The  laborers, 
however,  have  passed  no  self-denying  ordinance.  For  commodi- 
ties adapted  to  their  needs  there  is  an  unlimited  market.  To  be 
sure,  in  order  to  induce  purchase,  things  must  be  of  the  sort  they 
fancy.  But  there  is  no  difficulty  in  disposing  of  goods  of  this  sort, 
if  offered  cheap  enough.  Until  the  masses  of  mankind  come  to  be 
in  a  vastly  more  prosperous  condition  than  has  been  dreamed  of  in 
all  the  Utopias,  an  indefinitely  extensible  market  can  be  found  for 
goods  adapted  to  their  use. 

^ut,  to  repeat,  the  things  sold  to  laborers,  as  the  quantity  of  them 
increases,  must  be  offered  at  a  lower  price.  If  the  whole  process  of 
enormous  saving  and  appropriately  modified  production  is  carried 
on  relentlessly,  in  the  end  all  the  goods  for  laborers'  use  will  be  sold 
without  profit,  nay,  if  it  be  really  relentless,  at  a  loss.  There  will  be 
universal  overproduction  of  the  kind  which  those  maintaining  this 
possibility  have  in  mind  —  production  not  indeed  beyond  the 
possibility  of  sale,  but  beyond  the  possibility  of  sale  at  a  profit. 

^  Compare  Chapter  52,  §  2. 


56  THE  DISTRIBUTION  OF  WEALTH  [41-§  2 

The  real  cause  of  difficulty,  however,  .in  this  sort  of  situation 
evidently  is  not  overproduction  but  overaccumulation  and  over- 
investment. The  essence  of  normal  capitalistic  investment  is  that 
advances  are  constantly  being  made  to  laborers,  and  that  the 
laborers  are  constantly  producing  more  than  has  been  turned  over 
to  them.  The  supposed  increase  in  savings  and  the  decline  in 
luxurious  expenditure  would  bring  it  about  that  greater  and 
greater  amounts  were  paid  to  laborers  than  before.  If  this  keeping 
up  of  advances  were  carried  to  the  limit,  the  amounts  produced 
by  the  laborers  would  barely  suffice  to  replace  what  had  been 
advanced  to  them.  To  put  it  in  another  way:  before  the  process 
begins,  part  of  the  laborers  are  engaged  in  making  commodities 
for  the  capitalists'  consumption,  and  part  for  the  consumption  of 
the  laborers  themselves.  After  the  process  is  completed,  all  the 
laborers  (or  virtually  all)  are  engaged  in  making  goods  for  each 
other.  Then  the  laborers  will  be  consuming  all  that  they  produce, 
and  no  return  to  capital  can  emerge. 

The  very  statement  of  this  result  and  the  steps  by  which  it  is 
reached  shows  how  improbable  it  is.  The  thing  is  conceivable, 
but  so  improbable  that  it  may  be  declared  virtually  impossible. 
It  assumes  that  saving  and  investing  go  on  blindly  and  quite  irre- 
spective of  any  return.  Now,  as  has  been  pointed  out  in  the  pre- 
ceding chapters,  the  connection  between  accumulation  and  interest 
is  not  a  simple  one.  But  it  is  absurd  to  suppose  that  accumula- 
tion would  continue  unabated  if  it  resulted  in  no  return  at  all.  The 
very  sort  of  pressure  which  is  supposed  to  bring  about  this  univer- 
sal disappearance  of  profit  would  bring  quasi-automatically  its 
own  relief.  As  interest  fell,  more  and  more  of  the  well-to-do  would 
conclude  they  might  as  well  spend  as  invest;  would  buy  houses, 
pictures,  automobiles,  champagne,  and  would  cause  labor  to  turn 
to  making  such  things.  A  balance  would  in  due  time  be  restored, 
by  the  making  of  less  goods  for  laborers'  consumption  and  by  the 
return  of  profit  and  interest  in  all  branches  of  production. 

The  extent  to  which  the  process  of  continuing  investment  could 
be  carried,  and  the  approach  to  eventual  cessation  of  return,  would 
depend  on  the  effect  of  increasing  capital  on  the  productiveness  of 


41-§2]    OVERPRODUCTION  AND  OVERINVESTMENT  57 

industry.  As  was  noted  in  the  preceding  chapters,  some  econo- 
mists believe  that  increase  of  capital  means  increase  of  production 
without  limit;  an  unfailing  increase  in  the  output,  tho  at  a  dimin- 
ishing rate.  If  this  be  the  case,  a  return  to  capital  will  always  be 
secured,  however  great  the  rush  of  accumulation.  I  have  inti- 
mated my  own  view  that  the  gain  in  efficiency  from  the  application 
of  more  savings  and  the  making  of  more  capital  is  not  automatic  or 
certain,  but  depends  on  the  progress  of  invention.  ..However  that 
may  be,  it  is  agreed  on  all  hands  that  a  great  pressure  of  capital 
seeking  employment  will  lessen  the  return;  and  a  progressive 
lessening  of  the  return,  or  decline  in  interest,  will  bring  j^'^'o  tanto 
the  same  effect  as  disappearance  of  the  return;  it  will  check  accu- 
mulation and  so  bring  its  own  remedy. 
'l  Rodbertus,  one  of  the  ablest  socialists,  tried  to  explain  crises  by 
^^(si  theory  of  overproduction  very  similar  to  that  just  considered:  a 
theory  which  made  crises  an  inevitable  adjunct  of  private  owner- 
ship of  capital.  His  explanation  has  been  repeated  by  Marx  and  by 
other  socialists.  The  well-to-do,  it  is  alleged,  are  persistently  set 
on  investing  and  increasing  production;  the}^  are  not  disposed  to 
spend.  The  laborers,  on  the  other  hand,  have  not  the  wherewithal 
for  spending.  Hence  productive  power  tends  constantly  to  outrun 
consuming  power;  hence  the  recurrence  of  crises.  The  answer  is 
that  the  laborers  are  quite  able  to  spend.  The  process  of  invest- 
ment by  the  well-to-do  simply  means  that  the  "consuming  power" 
is  turned  over  to  the  laborers  in  the  form  of  wages.  There  is  no 
lack  of  consuming  power.  If  indeed  this  process  goes  to  its  limit, 
if  the  investors  persist  in  saving  willy-nilly,  the  ultimate  result 
must  be  overproduction  in  the  sense  of  disappearance  of  profit  or 
interest.  But  this  limit  will  never  be  reached.  Long  before  it  is 
approached,  an  end  will  come  of  the  excessive  investment;  demand 
will  be  readjusted,  and  the  various  sorts  of  goods  will  be  turned  out 
in  such  apportionment  that  (barring  the  inevitable  occasional 
mistakes)  all  will  be  sold  at  a  profit. 

This  analysis  of  extreme  cases  and  impossible  hj'potheses,  fan- 
ciful tho  it  may  seem,  is  necessary  in  order  to  bring  into  sharp  relief 
what  is  really  meant  by  overproduction  of  the  kind  supposed.    And 


68  THE  DISTRIBUTION  OF  WEALTH  [41-§  3 

it  has  more  bearing  on  the  actual  phenomena  of  modern  Hfe  than 
it  appears  at  first  sight  to  have;  because,  tho  the  extreme  case  is 
not  reached,  tendencies  do  exist  which  suggest  it.  To  these 
attention  may  now  be  given. 

§  3.  Accumulation  in  modern  times  does  proceed,  for  short 
periods,  blindly,  and  almost  automatically.  Savings  arelnade  and 
are  invested  merely  because  the  habit  of  doing  so  has  become 
ingrained  among  the  possessing  classes  and  because  the  mechanism 
for  the  first  steps  in  investment  has  been  so  perfected  —  public  and 
private  savings  banks,  investment  bankers,  stock  companies,  and 
the  like.  Hence,  for  familiar  and  approved  sorts  of  undertakings, 
there  is  always  available  "capital"  (in  terms  of  money)  without 
limit.  And  in  these  undertakings  there  is  a  great  and  nearly  con- 
stant pressure  of  competition  and  a  tendency  toward  "overproduc- 
tion "  —  that  is,  toward  putting  on  the  market  more  goods  than 
can  be  sold  at  a  profit.  This  tendency  is  not  peculiar  to  industries 
which  produce  commodities  for  laborers'  consumption.  It  appears 
in  any  well-established  industry,  or  rather  in  any  industry  conduct- 
ing its  operations  in  a  well-established  way.  Plere  competition  is 
ever  active.  The  return  to  capital  is  within  a  hand-breadth  of  the 
minimum;  there  is  constant  danger  of  something  like  "overpro- 
duction." And  this  in  turn  threatens  industrial  irregularity  and 
uncertainty  —  stoppage  because  of  disappearing  profit;  resump- 
tion after  awhile  in  the  hope  of  restored  profit;  unwillingness  to 
abandon  the  investment  entirely,  yet  inability  to  maintain  it,  or 
at  least  inability  to  enlarge  it,  at  a  profit. 

The  path  of  escape  from  this  danger  —  if  a  real  and  general 
danger  it  can  be  considered  —  is  obvious.  It  is  by  change,  at  once 
in  the  methods  of  production  and  in  the  direction  of  production. 
Change  in  the  methods  of  production  is  constantly  taking  place  in 
the  established  industries.  So  long  as  improvements  involving 
more  capital  (that  is,  more  application  of  preparatory  labor  in 
"roundabout"  methods)  are  made,  there  is  an  opening  for  a  return 
on  a  larger  investment.  Change  in  the  direction  of  production 
takes  place  by  variety,  by  finding  new  things  to  satisfy  newly 
awakened   wants.    Ornaments,  wall   papers,  rugs   and   carpets, 


41-§4]    OVERPRODUCTION  AND  OVERINVESTMENT  59 

tableware,  household  furniture,  fruits  —  there  are  hosts  of  new 
things  to  which  labor  has  been  turned  as  comp>etition  has  threat- 
ened overproduction  in  the  staples  which  alone  were  familiar  a 
few  generations  ago.  It  has  sometimes  been  pessimistically  said 
that  all  the  inventions  and  machinery  of  civilization  have  not 
improved  one  whit  the  lot  of  the  mass  of  mankind.  Yet  he  who 
will  observe  what  are  the  commodities  now  produced  for  the 
masses  and  compare  them  with  the  slender  list  of  things  available 
even  for  the  richest  but  a  century  ago,  must  see  how  mistaken  is 
the  statement.  It  is  more  nearly  true  that  the  toil  of  most  men 
has  become  no  less.  Certain  it  is  that  there  has  been  a  vast  gain 
in  the  abundance  and  variety  of  the  goods  which  yield  satisfac- 
tions. The  process  by  which  this  gain  has  been  secured  without 
"overproduction,"  that  is,  without  general  selling  at  a  loss,  has 
been  on  the  one  hand  thro  invention  and  improvement,  on  the 
other  thro  diversification  in  the  articles  produced. 

There  is  thus  a  show  of  reason  for  the  statement  that  the  capital- 
istic system  of  production  bears  in  its  bosom  the  seed  of  its  own 
destruction.  The  constant  pressure  of  accumulation  does  threaten 
to  annihilate  profit.  But  it  has  also  the  forces  of  recuperation  — 
invention  and  variety.  And  in  the  last  resort  there  is  always  the 
option,  sure  to  be  exercised  before  a  real  breakdown  occurs,  of 
ceasing  accumulation. 

§  4.  Among  individual  industries,  some  seem  to  be  more  than 
others  in  danger  of  occasional,  even  of  recurrent,  overproduction; 
that  is,  of  such  large  output  that  they  must  sell  at  a  loss.  Indus- 
tries of  a  familiar  kind,  which  use  a  very  large  plant,  seem  to  be 
in  this  case;  especially  if  they  are  subject  to  seasonal  irregularities 
of  demand. 

Thus  there  was  constant  talk,  for  many,  many  years,  of  "over- 
production" of  our  American  anthracite  coal  and  of  the  need  of_ 
reducing  the  siipi)ly  in  order  to  avoid  loss.  Xow,  like  all  mining, 
coal  mining  involves  a  large  investment  in  shafts,  levels,  machinery, 
transportation.  In  the  case  of  anthracite,  the  plant  must  be 
sufficient  to  supply  the  heavy  needs  of  the  winter  months;  since 
the  fuel  is  used  chiefly  for  domestic  purposes,  the  amount  called 


60  THE  DISTRIBUTION  OF  WEALTH  [41-§  5 

for  is  much  greater  in  that  season.  Coal  used  for  power,  as  bitu- 
minous coal  so  largely  is,  suffers  no  such  marked  seasonal  oscilla- 
tions of  demand.  The  plant  for  anthracite,  which  must  be  ade- 
quate in  winter,  is  more  than  adequate  in  summer.  There  is,  none 
the  less,  a  temptation  to  utilize  it  continuously,  summer  and  w  inter. 
As  with  all  plant,  there  is  a  loss  in  leaving  it  idle.  Storage  on  a 
great  scale,  which  would  equalize  the  irregularities  of  consumption, 
is  extremely  difficult.  Hence,  we  are  told,  there  is  recurring  over- 
production, and  some  agreement  must  be  reached  among  the 
producers  by  which  the  total  amount  put  on  the  market  shall  be 
kept  within  the  bounds  of  advantageous  disposal.  Otherwise 
there  is  feverish  activity  at  one  time,  with  cut-throat  competition, 
followed  by  stoppage  and  depression;  the  whole  round  means 
irregularity  of  employment  and  evil  social  conditions. 

It  is  on  such  grounds  as  these  that  combinations  have  been  said 
to  bring  real  advantage  to  society.^  It  is  not  imposjjjble  that  they 
will  do  so;  but  I  suspect  the  danger  is  exaggerated,  ^hile  the  remedy 
may  be  worse  than  the  disease.  Business  men  and  capitalists,  when 
they  speak  of  overproduction,  commonly  mean,  not  that  profits 
have  disappeared,  but  that  profits  are  less  than  they  wish.  They 
talk  of  maintaining  a  "fair"  proJfit,  when  they  really  wish  to  secure 
a  fat  profit.  Overproduction,  that  is,  supply  so  great  as  to  bring 
about  sales  at  an  actual  loss,  is  probably  much  less  common  than  the 
business  community  would  have  us  suppose;  and  when  it  occurs,  it 
is  due  to  oscillations  in  demand  which  would  probably  affect  a  com- 
bination or  trust  as  much  as  a  body  of  scattered  producers.  The 
advocacy  of  combination  as  a  means  of  avoiding  overproduction 
and  industrial  irregularity  is  commonly  a  mere  excuse  for  trying  to 
build  up  a  monopoly  which  will  restrict  production,  and  secure  (or 
try  to  secure)  regularity  at  the  expense  of  extra  levies  on  the  public. 

§  5.  Some  of  the  phenomena  connected  with  crises,  and  espe- 
cially the  course  of  events  during  a  period  of  depression,  have  been 
ascribed  to  overproduction.  During  times  of  depression,  it  would 
seem,  more  is  produced  than  can  be  readily  sold  or  than  can  be 
sold  at  a  profit:  is  there  not  general  overproduction? 

^  Compare  what  is  said  below,  Chapter  65,  §  6. 


41-§5]    OVERPRODUCTION  AND  OVERINVESTMENT  61 

These  phenomena,  however,  result  from  the  breakdown  of  the 
machinery  of  exchange.^  They  are  not  due  to  permanent  or  deep- 
seated  difficulties  of  finding  an  extensible  or  profitable  market. 
They  are  due  to  the  fact  that  confidence  has  been  shaken,  credit 
disturbed^ -the  usual  course  of  production  and  sale  subjected  to 
^^9ckr-  They  may,  indeed,  be  ascribed  in  part  to  some  real  "  over- 
production "  —  to  the  fact  that  some  industries  have  been  pushed 
beyond  the  needs  of  the  present,  possibly  beyond  any  needs  whether 
present  or  future.  These  things  correct  themselves  in  time.  The 
mechanism  of  exchange  is  restored  to  its  normal  working,  and 
the  maladjustment  in  production  is  set  right.  Unfortunately,  as 
we  have  seen,  a  state  of  completely  normal  adjustment  is  never 
reached.  Undue  activity  is  likely  to  succeed  undue  depression. 
But  these  oscillations  are  in  essentials  not  connected  with  any  ten- 
dency  to   ajfiberal   overproduction.     The   problems   which  they 


present  relatJiHlargely  to  money,  banking,  credit;  for  a  solution, 
they  point  to  fne  improvement  of  intelligence  and  the  possibility 
of  conducting  industry  with  progress  and  yet  without  irregularity. 
They  are  little  related  to  those  supposed  limitations  of  demand 
and  those  possibilities  of  permanent  overinvestment,  which  are 
urged  by  the  persons  who  maintain  that  there  is  danger  of  general 
overproduction. 

^  See  the  Chapter  on  Crises  (Chapter  28). 


CHAPTER  42 
Rent,  Agriculture,  Land  Tenure 

Section  1.  The  theory  of  surplus  produce  or  "rent."  Rent  does  not  enter 
into  the  price-determining  expenses  of  production.  Rent  is  not  the 
specific  product  of  land,  62  —  Sec.  2.  The  existence  of  rent  is  dependent 
upon  diminishing  returns  from  land.  Advantages  of  situation  as  affect- 
ing rent,  65  —  Sec.  3.  Quahfications  of  the  principle  of  diminishing 
returns :  a  possible  stage  of  increasing  returns ;  specific  plots  alone  to  be 
considered;  proposition  refers  to  physical  quantity  of  produce,  not  to 
value;  a  given  stage  of  agricultural  skill  assumed,  68  —  Sec.  4.  The  stage 
when  the  tendency  to  diminishing  returns  is  sharp,  72  —  Sec.  5.  Are 
there  original  and  indestructible  powers  of  the  soil?  Predatory  cultiva- 
tion; intensive  and  extensive  agriculture.  Inherent  differM|ces  tend  to  be 
lessened,  but  do  not  disappear,  73  —  Sec.  6.  Land  teni^ft  Cultivation 
by  owners,  each  with  moderate  holdings,  of  greatest  §^s\  advantage, 
77  —  Sec.  7.  Should  the  community  appropriate  (jPretain  for  itself 
agricultural  rent?  80. 

§  1.  To  understand  the  reasoning  of  the  present  chapter,  the 
reader  should  turn  back  to  Book  I,  Chapter  13.  There  value  under 
the  conditions  of  differing  cost  and  diminishing  returns  was 
analyzed.  Equilibrium  of  supply  and  demand  is  found  under  these 
conditions  when  marginal  cost  and  marginal  vendibility  are  equal. 
Stated  in  simpler  terms,  the  cost  of  the  most  expensive  portion  of 
the  supply  regulates  the  long-run  value  of  the  whole  supply. 

It  follows  that  those  who  produce  at  lower  cost  secure  more 
than  ordinary  gains.  Referring  once  more  to  the  diagram  (vol.  I, 
p.  177),  it  will  be  seen  that  the  marginal  producer  at  B,  who  sells  at 
the  price  BP',  secures  the  ordinary  gains  on  capital  and  the  ordi- 
nary remuneration  for  labor  —  whether  his  own  capital  and  labor, 
or  labor  and  capital  which  he  hires  at  interest  and  for  wages.  If 
he  did  not  secure  such  gains,  he  would  sooner  or  later  withdraw 
from  the  industry.  The  producer  at  A  has  smaller  expenses  of 
production,  measured  by  the  distance  AA',  and  it  would  be  per- 
fectly possible  for  him  to  continue  operations  at  the  price  AA'. 
The  producer  at  0,  who  has  the  greatest  advantage  of  all,  could 

62 


42-§l]         RENT,  AGRICULTURE,  LAND  TENURE  63 

continue  operations  if  the  price  were  as  low  as  SO.  Both  sell, 
none  the  less,  at  the  ruling  price  BP'  —  PO  —  the  price  which 
must  be  paid  in  order  to  make  it  worth  while  for  the  producer  at  B 
to  keep  on,  and  which  must  be  paid  in  order  to  bring  about  equi- 
librium. The  difference  between  the  larger  sum  BP'  and  the  smaller 
sums  A  A'  and  SO  measures  an  extra  gain  for  the  more  advan- 
tageous intra-marginal  producers.  The  total  gain  to  all  these 
fortunate  persons  is  indicated  by  the  area,  of  approximately  tri- 
angular shape,  PP'S. 

Thjs-^ditional  amount,  secured  by  those  producers  who  have 
advantages  over  the  marginal  producer^ is  commonly  called  "rent" 
by^writers  on  economics,  because  it  usually  arises  in  connection 
with  land.  It  has  been  proposed  to  call  it  "producer's  surplus." 
In  ordinary  parlance,  rent  signifies  a  sum  paid  by  one  person  to 
another  for  the  loan  or  lease  of  any  durable  thing,  such  as  a  tract 
of  land,  a  house,  a  piano.  Its  use  by  English-speaking  economists 
to  signify  producer's  surplus,  with  special  reference  to  land,  has 
gone  on  for  several  generations,  and  on  the  whole  has  served  to  affix 
to  the  word  "rent"  this  technical  sense.  It  is  true  that  "pro- 
ducer's surplus"  is  more  apt,  and  that  the  technical  meaning  of 
rent  has  the  disadvantage  of  conflicting  with  everyday  usage,  and 
so  of  leading  to  misunderstanding  among  those  not  familiar  with  the 
terminology  of  the  writers  on  economics.  But  "rent"  has  the 
advantage  of  brevity,  and  the  sanction  of  long-continued  usage  by 
the  best-known  writers.  It  will  be  used  in  this  book  in  the  tech- 
nical sense.  Where  there  is  danger  of  misunderstanding,  it  will 
be  spoken  of  as  "economic  rent."  Where  the  word  "rent"  is  used 
in  its  popular  and  not  in  its  technical  sense,  the  context  or  express 
warning  will  guard  against  confusion. 

Rent  forms  no  part  of  the  expenses  of  production;  that  is,  it 
forms  no  part  of  those  expenses  of  production  which  affect  price. 
It  is  a  differential  gain,  an  excess  over  and  above  the  total  expenses 
of  the  more  fortunate  producers.  Price  is  determined  by  the  cost 
of  the  marginal  increment.  Rent  is  not  one  of  thejactors  bearing 
on  price,  but  is  the  result  of  price.  It  is  due  to  the  comparatively 
high~price^ which  must  be  paid  to  bring  out  the  total  supply. 


64  THE  DISTRIBUTION  OF  WEALTH  [42-§  1 

It  Is  true  that  there  are  conditions  under  which  rent  may  seem 
to  enter  Into  the  expenses  of  some  producers.  Suppose  that  a  pro- 
ducer at  the  point  0,  possessed  of  a  source  of  enduring  advantage 
—  say  a  fertile  or  advantageously  situated  plot  of  land  —  does 
not  wish  to  carry  on  operations  himself,  but  lets  his  land  to  some 
one  else.  That  other  person  will  be  able  to  pay  him  for  the  use 
of  the  land  an  amount  measured  by  SP,  or  the  total  rent.  Not 
only  will  he  be  able  to  do  so,  but  he  will  be  compelled  to  do  so  by 
competition.  On  that  land  the  amount  SO  suffices  to  meet  all 
the  expenses  of  production,  Including  remuneration  to  labor  and 
adequate  return  to  capital.  If  the  owner  offers  It  for  use  by 
tenants,  they  will  bid  against  each  other  for  the  land  up  to  the  point 
where  they  will  retain  for  themselves  the  usual  return  for  labor  and 
capital;  that  is,  they  will  bid  a  rent  up  to  the  amount  8P.  There- 
after the  tenant,  having  contracted  to  pay  SP  as  rent,  will  say  that 
his  expenses  of  production  are  no  less  high  than  those  of  the 
marginal  producer  at  B.  Tho  he  pays  less  out  for  labor  and  the 
like,  he  pays  rent,  which  the  marginal  producer  has  not  to  pay. 
From  his  point  of  view,  rent  is  as  much  an  expense  as  wages, 
and  his  total  expenses  are  no  less  than  those  of  any  other  pro- 
ducer. But  all  payments  of  rent,  tho  they  are  called  expenses 
by  such  tenants,  clearly  stand  In  a  different  relation  to  the  price 
from  the  expenses  at  the  margin  of  production.  They  are  the 
consequence  of  lessened  expenses  within  the  margin,  not  the 
cause  of  price  at  the  margin.  They  equalize  the  position  of  different 
persons  no  one  of  whom  is  so  fortunate  as  to  own  an  advantageous 
source  of  supply.  For  the  person  who  does  own  such  an  advan- 
tageous source,  they  form  an  extra  gain,  which  Is  secured  equally 
whether  he  exploits  his  advantage  on  his  own  account  or  receives  a 
payment  from  another  who  bids  for  the  privilege  of  using  It. 

The  typical  case  of  rent,  and  the  one  which  serves  most  readily 
to  Illustrate  the  principle,  Is  that  of  agricultural  land.  Suppose 
that  the  producers  at  0,  A,  and  B  have  farms  of  different  fertility. 
The  same  application  of  labor  and  capital  yields  at  0  25  bushels  of 
wheat  to  the  acre,  at  A  20  bushels,  and  at  5  15  bushels  to  the  acre. 
The  price  must  be  such  as  to  make  wheat-raising  at  5  worth  while; 


42-§2]         RENT,  AGRICULTURE,  LAND  TENURE  65 

otherwise  the  total  supply  will  not  be  forthcoming.  The  supply 
which  can  be  raised  at  0  and  A  is  limited  and  an  additional  supply 
must  be  got  at  B  before  an  equilibrium  of  supply  and  demand  is 
reached.  The  price  is  high  enough  to  bring  normal  returns  to  the 
producer  at  i?  for  15  bushels  to  the  acre.  The  receipts  from  15 
bushels  also  suffice  to  cover  the  expenses  (including  usual  return 
to  capital)  for  the  producer  at  A.  The  extra  5  bushels  got  from 
his  land  thus  constitute  an  extra  gain  for  him.  Similarly  the  extra 
ten  bushels  at  0  yield  an  extra  gain  for  the  producer  at  0.  And 
if  the  owners  oi  AovO  chose  to  let  their  lands,  instead  of  cultivating 
for  themselves,  they  could  secure  rents  of  5  and  10  bushels  to  the 
acre,  or  the  equivalent  in  money  price.  It  is  immaterial  w^hether 
they  secure  the  advantage  from  the  better  site  in  the  one  form  or 
the  other. 

Rent  is^ometimes^aid  to  be  the  specific  product  of  land.  Simi- 
larly, interest  is  often  said  to  be  the  product  of  capital,  and  wages 
the  product  of  labor;  and  thus  three  elements  in  distribution  — 
wages,  interest,  rent . —  are  set  against  three  factors  in  production 
—  labor,  capital,  land.  But  this  phraseology  is  to  be  used  with 
caution.  The  reasons  for  questioning  it  with  regard  to  capital 
have  been  already  stated.^  Labor  applied  in  some  ways  (thru  the 
use  of  tools)  yields  more  than  labor  applied  in  other  ways;  in  this 
sense  only  is  there  a  productivity  of  capital.  The  same  care  in  the 
use  of  the  term  should  be  observed  in  the  case  of  land.  Labor  on 
some  land  yields  more  than  labor  applied  on  other  land;  in  this 
sense  onl}^  is  there  a  productivity  of  land.  If  land  were  unlimited 
in  supply  and  all  of  uniform  quality,  the  natural  forces  inherent  in 
it  would  still  be  directed  and  utilized  by  labor.  But  there  would 
be  no  differential  return  on  any  plot  of  land,  no  emergence  of  rent, 
no  notion  of  a  separate  productivity  of  land  leading  to  rent.  Rent 
arises  because  of  the  limitation  of  the  better  sources  of  supply;  1) 
because  of  differences  in  the  amounts  brought  forth  by  equal  quan-  "^i 
titles  of  labor. 

§  2.   Such  is  the  fundamental  principle  of  rent.     But  it  requires 
many  qualifications.    These  concern  the  kinds  and  causes  of  dif- 
1  See  Chapter  38,  §  4. 


66  THE  DISTRIBUTION  OF  WEALTH  [42- §  2 

ference  in  productiveness,  and  need  separate  consideration.  The 
case  of  agricultural  land,  which  has  been  used  most  often  to  illus- 
trate the  principle,  may  be  first  taken  up,  and  will  engage  our 
attention  for  the  rest  of  the  present  chapter. 

Unless  there  were  a  tendency  to  diminishing  returns  from  any 
one  plot  of  land,  there  would  be  no  such  thing  as  rent.  JLLthe 
better  sources  of  supply  could  be  pushed  indefinitely  without 
lessening  of  yield  —  if  more  and  more  labor  and  capital  could  be 
applied  to  a  given  plot  of  land  and  could  always  bring  an  increase 
of  product  proportionate  to  the  additional  outlay  —  then  those 
better  sources  of  supply  only  would  be  resorted  to.  The  less  good 
lands  would  be  left  untouched,  and  all  agricultural  produce  would 
be  got  from  the  best  lands.  The  fact  that  this  is  not  the  case;  that 
good  lands,  mediocre  lands,  and  poor  lands  are  cultivated  side  by 
side  —  proves  that  at  some  stage  there  appears  a  tendency  to 
diminishing  returns  from  any  one  plot  of  land. 

When  additional  labor  and  capital  are  applied  to  cultivation,  it 
may  be  a  matter  of  indifference  whether  they  be  applied  to  poorer 
land,  or  to  the  better  land  under  poorer  conditions.  In  the  pre- 
ceding section,  three  grades  of  land  were  assumed,  having  yields, 
for  the  same  application  of  labor  and  capital,  of  25,  20,  and  15 
bushels  to  the  acre.  But  it  might  also  be  supposed  that  the  three 
applications  of  labor  and  capital  were  all  made  on  the  same  land, 
yielding  successively  diminishing  returns  in  the  ratio  of  25, 20, 15. 
In  either  case,  the  marginal  product  is  15.  In  either  case,  the  15 
bushels  constituting  the  last  installment  will  not  be  brought  to 
market  unless  the  price  is  such  as  to  make  their  production  worth 
while;  hence,  in  either  case,  the  other  installments  bring  a  surplus 
or  rent.  In  either  case,  the  margin  of  cultivation  is  that  stage  in 
production  where  only  the  normal  returns  to  labor  and  capital  are 
secured.  The  margin  is  said  to  be  extensive,  when  poorer  land 
is  resorted  to;  it  is  said  to  be  intensive,  when  more  capital  and 
labor  are  applied  under  less  favorable  conditions  to  the  better 
land.  Difference  in  yield  would  appear,  and  therefore  a  differ- 
ential return,  even  tho  all  land  were  originally  of  the  same 
quality.     In  fact,  there  is  never  such  a  thing  as  equality  in 


42-§2]         RENT,  AGRICULTURE,  LAND  TENURE  67 

the  natural  endowments  of  land.  Some^  land  is.  better  than 
othe^  hence  there  is  both  an  extensive  and  an  intensive  margin 
of  cultivation.  ^^ 

T5Ifferences  in  situation  have  precisely  the  same  effect  as  differ;^ 
ences  in  fertility,  ^n  apt  illustration  of  the  effects  of  situation 
(first  elaborated  by  the  German  economist,  Thiinen)  is  got  by 
supposing  all  land  to  be  of  the  same  quality,  and  to  be  situated  on 
all  sides  of  a  central  city  to  which  its  produce  is  brought  for  sale. 
Imagine  concentric  circles  to  be  drawn  about  such  a  central  point. 
Evidently  the  land  in  the  nearer  rings  has  an  advantage  over  that 
in  the  more  distant  rings.  All  the  produce  is  sold  in  the  central 
market  at  the  same  price;  but  that  from  the  more  distant  land  has 
to  bear  a  higher  cost  of  transportation,  and  its  cultivator  must  be 
reimbursed  for  this.  The  owner  of  the  nearer  land  has  an  advan- 
tage which  causes  rent  to  arise. 

The  advantage  due  to  situation  obviously  is  less,  the  lower  the 
cost  of  transportation.  The  cheapening  of  carriage  in  modern 
times  has -greatly  diminished  the  importance  of  situation  rent. 
This  is  strikingly  the  case  for  all  agricultural  produce  —  grain  for 
example  —  which  is_easily:jtransportable.  Tho  refrigerating  ap- 
paratus and  fasFfreight  facilities  have  made  it  possible  to  bring 
meat,  fruit,  vegetables,  and  milk  from  very  distant  sources  of 
supply,  the  nearer  lands  still  have  some  advantage  from  the  situa- 
tion. If  indeed  the  rates  of  transportation  should  be  the  same  for 
all  distances,  the  advantage  would  disappear.  The  railways  which 
bring  the  milk  to  some  of  the  large  cities  of  the  United  States 
adopted  at  one  time  the  practise  of  a  "postage  stamp  rate"  — 
that  is, an  even  charge  on  all  shipments, distance  being  disregarded. 
So  far  as  they^carried  out  this  method,  advantages  in  situation  and 
consequently  economic  rent  resulting  from  situation  were  done 
"away  with  for  milk  farms.  As  it  happened,  public  authority  was 
appealed  to  by  the  owners  of  the  nearer  lands  to  prevent  this 
practise,  it  being  alleged  that  it  was  unreasonable  and  unjust  to 
fix  rates  of  transportation  without  regard  to  distance.  The  Inter- 
state Commerce  Commission  sustained  this  contention,  and~for^ 
bade  the  postage  stamp  rate;  tho  it  would  seem  to  have  been  to 


68  THE  DISTRIBUTION  OF  WEALTH  [42-§  3 

the  advantage  of  milk  consumers,  and  not  in  violation  of  any 
sacred  or  inalienable  rights  of  the  nearer  producers,  i 

§  3.  We  proceed  now  to  some  qualifications  and  explanations 
of  the  principle  of  diminishing  returns. 

In  some  stages  of  agriculture  it  may  not  appear  at  all.  There 
are  circumstances  under  which  additional  applications  of  labor  and 
capital  may  yield  for  a  time  not  less  in  proportion,  but  more.  This 
is  most  likely  to  occur  where  a  people  advanced  in  civilization 
suddenly  takes  under  cultivation  virgin  land,  as  has  been  the  case 
during  the  last  century  in~tEe~tJmted  States  and  in  other  new 
countries. '  In  the  first  or  pioneer  stage,  cultivation,  for  such  a 
people,  often  proceeds  under  difficulties.  A  second  stage  is  reached, 
[,.  when  more  labor,  more  elaborate  clearing  and  draining,  more  ex- 
pensive agricultural  implements,  are  put  on  the  land;  and  then 
only  is  the  largest  return  per  unit  of  labor  and  capital  attained. 
The  question  may  be  asked,  how  it  happens  —  if  this  be  the  case  — 
that  additional  lands  are  taken  under  cultivation  at  all  before  the 
stage  of  maximum  productivity  is  reached  on  those  previously 
resorted  to.  The  answer  is  that  the  pioneer  farmer  looks  not  only 
to  present  yield,  but  to  the  coming  years  when,  as  owner  of  the  soil, 
he  will  possess  much  land  in  good  condition.  It  is  the  lodestone 
of  complete  ownership  that  attracts  men  to  the  breaking  up  of  the 
wilderness.  But  the  stage  of  increasing  returns  which  the  process 
of  settlement  thus  involves  is  but  a  temporary  one  —  temporary, 
that  is,  in  the  industrial  life  of  a  community.  Before  many  years, 
still  another  stage,  and  one  enduring  indefinitely,  is  reached :  the 
time  comes  when  the  land,  tilled  in  the  more  careful  way  of  the 
post-pioneer  stage,  begins  to  cease  responding  to  more  intensive 
use.  Diminishing  returns  show  themselves  and  agriculture  reaches 
what  we  may  consider  its  normal  condition. 

Next,  it  is  to  be  observed  that  the  tendency  to  diminishing 
returns  holds  good  only  of  a  specific  plot  or  specific  plots  of  land. 
It  does  not  necessarily  follow  that  modern  communities  in  general 
have  to  face  difficult  conditions.     There  may  be  additional  plots 

^  Compare  what  is  said  below,  Chapter  62.  On  milk  rates,  see  Interstate 
Commerce  Commission  Reports,  Vol.  VII,  p.  92. 


42-§3]         RENT,  AGRICULTURE,  LAND  TENURE  69 

of  available  land,  no  less  good  than  those  already  used.  The  open- 
ing up  of  new  regions  has  had  far-reaching  effects  of  this  sort.  It 
has  greatly  affected  the  older  countries  of  Europe  as  well  as  the 
new  countries  themselves,  and  has  given  rise  to  the  knotty  problems 
already  considered,^  about  the  advantages  of  the  trade  between 
them.  In  the  broad  sweep  of  history,  these  are  but  temporary 
deviations  from  the  permanent  course  of  things;  but  for  recent 
generations  they  have  been  of  great  consequence. 

Further,  the  proposition  that  returns  tend  to  diminish  is  to  be 
understood  as  referring  to  physical  quantity  of  produce,  not  to 
value.  It  means  that  less  bushels  of  wheat  or  of  corn  are  got, 
less  pecks  of  potatoes  or  peas,  not  that  the  cultivator  gets  a  less 
money  return.  Indeed,  it  is  part  of  the  proposition  that  he  get  an 
undiminished  money  yield.  The  price  of  wheat  or  potatoes  rises 
jn  accord  with  the  additional  expenses  neecled Tor  producing  the  last. 
Jncrement.  L^nless  the  price  did  so  rise,  the  farmer  would  not 
grow  the  additional  produce.  It  is  not  the  farmer  who  has  to  face_ 
unpleasant  possibilities;  it  js_the  consumer,  that  is, tlie  population 
at  large.     Only  so  far  as  the  farmer  himself  is  a  consumer  of 


agricultural  produce  is  he  involved  in  the  unwelcome  consequences 
which  follow  from  the  tendency  to  diminishing  returns. 

Failure  to  understand  this  distinction  between  quantity  and 
value  has  led  to  some  curiously  erroneous  speculation  on  social 
problems.  ,  The  tendency  to  diminishing  returns  has  always  been 
eyed  askance  by  the  constructors  of  Utopias.  It  is  an  obstacle  in 
the  way  of  unlimited  increase  of  production,  still  more  in  the 
way  of  unlimited  increase  in  population.  Hence  a  tendency  to  pooh- 
pooh  it,  and  to  look  about  for  evidence  purporting  to  discredit  it. 
The  fact  that  the  cultivator  earns  no  less  under  high  cultivation 
is  supposed  to  supply  such  evidence,  it  being  ignored  that  not  the 
earnings  of  the  cultivator  are  in  question,  but  the  physical  quanti- 
ties produced  by  him.  A  striking  illustration  of  this  sort  of 
fallacious  reasoning  is  in  a  passage  in  which  the  unshrinking 
optimist,  Kropotkin,2  points  to  the  high  earnings  of  market  gar- 

»  See  Chapter  37,  §  4. 

'  See  Kropotkin,  Fields,  Factories,  and  Workshops,  pp.  73-87.     The  passage  is 


70  THE  DISTRIBUTION  OF  WEALTH  [42-§  3 

deners  who  raise  produce  for  city  markets  on  small  plots  of  land. 
Consider  how  much  in  money  value  is  produced  on  a  tiny  piece! 
Can  it  be  said  there  is  any  evidence  of  diminishing  returns  or  indeed 
any  practical  limit  to  what  can  be  produced  from  land?  Quite 
true;  there  is  no  limit  to  the  soaring  of  the  value  of  the  produce. 
The  market  gardener  who  raises  early  peas  or  green-house  toma- 
toes may  get  a  yield  of  thousands  of  dollars  per  acre.  But  he 
does  not  feed  himself,  or  feed  his  customers.  He  supplies  an 
expensive  luxury.  The  bulk  of  the  quantity  of  produce  used  by 
him  and  his  customers  must  come  from  other  and  perhaps  distant 
land.  For  the  community  as  a  whole  the  tendency  to  diminishing 
returns  on  each  several  plot  of  land  must  be  accepted  as  an 
obstacle  to  the  indefinite  advance  of  production  and  population, 
and  as  a  limit  which  must  be  soberly  faced  in  all  schemes  of  social 
reconstruction. 

Finally,  thfijtendency  to  diminishing  returns  must  be  understood 
with  reference  to  a  give  stage  in  the  agricultural  arts.  New  and 
better  ways  of  using  the  land  may  Ibe  discovered,  and  may  make 
possible  an  increase  of  product  in  proportion  to  the  increase 
of  labor  applied ;  nay,  may  make  possible  a  gain  more  than  in  pro- 
portion to  the  additional  labor.  Thus,  during  many  centuries, 
from  the  dawn  of  the  middle  ages  until  within  a  hundred  years 
(more  or  less),  it  was  customary  in  European  countries  that  a  part 
of  the  land  —  usually  a  third  —  should  lie  fallow  each  year,  serving 
during  that  time  only  as  a  lean  pasture  for  common  use.  The  land 
actually  under  cultivation  at  any  one  time  was  only  two  thirds  of 
the  total;  and  any  particular  plot  after  being  in  use  for  two  years 
was  idle  and  recuperating  for  a  third.  About  the  middle  of  the 
eighteenth  century  root  crops,  especially  clover,  were  found  to 
offset  in  large  part  the  exhaustion  of  the  soil  which  results  from 
continuous  grain-growing ;  and  a  systematic  rotation  of  crops  came 
into  use,  which  enabled  all  the  land  to  be  kept  under  cultivation  all 
the  time,  and  yet  (with  judicious  use  of  fertilizers)  to  maintain  its 
productive   power.     After   this  great  change,    more  labor   was 

quoted  with  approval  by  so  clear-headed  a  thinker  as  Bertrand  Russell,  Proposed 
Roads  to  Freedom,  pp.  60,  90-92. 


42-§3]         RENT,  AGRICULTURE,  LAND  TENURE  71 

applied  to  each  plot  of  land  than  had  been  applied  before;  yet  was 
applied  under  more  favorable  conditions.  Again,  during  the  last 
half  century,  the  applications  of  chemistry  to  agriculture  have 
shown  the  way  to  still  better  culture  —  more  elaborate  rotation 
of  crops,  and  the  use  of  new  fertilizers.  The  methods  of  plowing, 
draining,  the  selection  of  new  varieties  of  plants  and  animals,  have 
also  been  greatly  advanced .  Not  least,  agricultural  machinery  and 
tools  have  been  greatly  improved  and  cheapened.  Hence  the  soil, 
when  utilized  in  the  best-known  way,  has  been  pushed  more  and 
more,  with  yet  —  up  to  a^cer^iin jpoint  —  no  diminution  in  the 
Imarginal  returjtx. 

It  seems  paradoxical  to  say  that  there  is  a  real  tendency  to  di- 
miriishihg  retiirns,  and  also  that  in  fact  there  have  been  increasing 
returns.  Yet  both  statements  are  true.  Tho  in  backward  coun- 
tries, like  British  India  and  China,  and  even  in  some  parts  of 
Europe,  the  soil  still  is  used  in  the  ways  that  we  regard  as  primitive 
—  ways  that  prevailed  five  hundred  years  ago  —  agricultural 
labor  in  the  United  States  and  in  most  parts  of  Europe  is  applied 
with  much  more  intelligence  and  with  better  effect  than  five  hun- 
dred years  ago,  or  one  hundred  years  ago.  None  the  less  there 
remains  a  tendency  to  diminishing  returns.  Improvements  in  the 
way  of  rotation,  fertilizers,  deeper  plowing,  systematic  drainage, 
sta^'e  off  for  a  while  the  decline  in  return.  So  long  as  the  amount 
which  it  is  attempted  to  get  out  of  any  one  plot  remains  moderate, 
the  stage  of  pressure  is  not  reached.  But  this  moderate  limit 
passed,  any  attempt  to  get  an  increase  of  product  encounters  seri- 
ous and,  before Jong^Jmpassable  oLsta£les. , 

So  far  as  permanent  differences  in  the  yield  from  the  different 
sites  are  concerned,  it  matters  much  whether  agricultural  improve- 
ments are  equally  applicable  to  all  land  or  are  applicable  only  to 
some  land.  If,  for  example,  they  were  applicable  only  to  the 
poorer  grades  of  land  (or  those  deemed  poorer  in  the  earlier  stages 
of  the  agricultural  arts) ;  if  by  some  processes  of  drainage,  clearing, 
and  leveling,  available  only  for  some  soils  once  disadvantageous, 
these  could  be  made  as  fertile  as  those  previously  more  fertile  — 
then  rent,  so  far  as  due  to  the  superiority  of  some  lands  over  others, 


72  THE  DISTRIBUTION  OF  WEALTH  [42-§4 

would  disappear,  and  would  emerge  only  as  all  land  came  to  be  more 
intensively  used.  But  if  the  improvements  in  agriculture  were 
equally  applicable  to  all  lands,  the  differences  between  them 
would  remain.  Good  lands  and  bad  would  alike  yield  more,  but 
there  would  still  be  an  extra  yield  on  the  good  lands;  hence,  so  far 
as  both  were  cultivated  side  by  side,  there  would  be  inequality  of 
return  for  the  same  labor,  that  is,  rent.  And  this  in  general  has 
been  the  effect  of  agricultural  improvements.  They  do  not  oblit- 
erate the  inherent  differences.  The  only  sort  of  improyement 
which  has  markedly  unequal  effects  is  the  cheapening  of  transpor- 
tation, which  brings  the  more  distant  lands  virtually  nearCT  and 
greatly  reduces  advantage  of  situation. 

§  4.  With  regard  to  any  given  plot  of  land,  there  is  a  stage  at 
which  it  may  be  said  with  substantial  accuracy  that  the  land  yields 
all  of  which  it  is  capable.  It  can  then  maintain  virtually  no  more 
persons.  It  is  only  for  the  purpose  of  illustrating  the  general 
principle  of  diminishing  returns  that  we  suppose  such  an 
evenly  ascending  curve  as  that  of  the  figure,  vol.  I,  p.  177. 
Before  long  the  stage  is  reached  when  a  steeply  ascending 
curve  would  represent  the  situation.  The  land  can  indeed  be 
made  to  yield  more  and  the  ascent  would  not  become  quite  vertical. 
But  the  increase  in  cost  for  additional  yield  is  prohibitory. 

Tho  agricultural  improvements  counteract  this  tendency,  and 
remove  further  the  stage  when  the  tendency  to  diminishing  returns 
shows  itself  sharply,  they  seldom  have  great  and  rapid  effects. 
When  once  a  country's  land  is  all  taken  up  and  is  brought  under 
that  kind  of  cultivation  which  the  existing  knowledge  of  agriculture 
has  made  familiar  as  the  best,  further  advance  of  production  takes 
place  but  slowly.  Population  can  then  increase  but  slowly,  so  far 
as  it  depends  for  support  on  the  country's  own  land.  It  is  true 
that  some  economists  and  students  of  agriculture  believe  that  with 
widespread  utilization  of  the  best  kinds  of  tillage,  the  yield  of  the 
land  could  be  much  increased  even  in  thickly  settled  and  highly 
cultivated  European  countries.  I  suspect  that  these  possibilities 
are  exaggerated.  In  any  case,  the  rapid  adoption  of  the  best 
methods  is  checked,  especially  on  the  continent  of  Europe,  by  the 


42-§5]  RENT,  AGRICULTURE,  LAND  TENURE  73 

ignorance  and  stolidity  of  great  sections  of  the  agricultural  popu- 
lation. Even  tho  there  be  considerable  possibilities  of  improve- 
ment, the  stage  where  diminishing  returns  will  begin  to  appear 
sharply  is  in  fact  not  far  ahead.  If  a  marked  increase  of  popula- 
tion in  modern  times  has  not  caused  a  severe  pressure  to  be  felt, 
the  explanation  is  found  in  that  great  change  which  has  so  pro- 
foundly influenced  all  recent  economic  history  —  the  extraordi- 
nary improvements  in  transportation  and  the  opening  of  addi- 
tional sources  of  supply  in  new  countries. 

§  5.  Ricardo,  with  whose  name  the  theory  of  rent  is  most  asso- 
ciated, reinarked  that  rent  "is  paid  ...  for  the  use  of  the  original 
and  indestructible  powers  of  the  soil."  But  it  is  urged  that  the  soil 
has'iioindestrtictible  powers.  ""  "if'continually  cropped,  it  loses  its 
powers.  "Worn-out  land"  is  a  familiar  phenomenon.  The  soil 
contains  certain  chemical  constituents,  which  are  taken  from  it 
by  growing  plants  and  whose  continued  loss  means  the  eventual 
destruction  of  fertility.  The  chief  of  them  is  nitrogen.  This  is 
restored  (tho  by  uncertain  and  irregular  steps)  thru  the  spontane- 
ous action  of  nature  if  the  land  be  not  cropped ;  hence  the  ancient 
practise  of  allowing  land  to  lie  fallow,  or  allowing  it  to  "rest." 
But  it  is  restored  more  promptly  and  effectively  by  fertilizers  and 
by  the  rotation  of  crops,  and  especially  by  the  root  crops.  On 
all  these  chemical  processes  the  science  of  modern  times  has  thrown 
a  flood  of  light,  explaining  the  practises  which  had  been  empiri- 
cally worked  out  in  former  times  and  pointing  the  way  to  new 
and  better  practises.  Certain  it  is  that  improvident  cultivation 
wastes  the  powers  of  the  soil,  and  that  there  is  need  of  restoring  to 
it  what  continuous  cropping  removes. 

When  new  land  is  first  taken  in  cultivation,  the  necessity  of  res- 
toration is  not  felt.  The  store  of  elements  of  fertility  is  then  large. 
It  may  maintain  itself,  notwithstanding  continuous  drain,  for  years 
and  even  for  a  generation.  If  there  be  plenty  of  new  land,  another 
parcel  can  be  taken  under  cultivation  when  signs  of  exhaustion 
appear  on  that  first  used ;  and  so  on,  as  long  as  new  land  is  available. 
This  is  what  the  Germans  call  "  Raub-bau"  —  predatory  cultiva- 
tion.   Thus,  on  the  sugar  lands  of  Cuba,  the  crop  is  grown  contin- 


74  THE  DISTRIBUTION  OF  WEALTH  l42-§5 

uously  year  after  year,  the  juice  being  extracted  from  the  cane,  and 
the  stalks  and  leaves  burned  as  fuel.  There  is  no  fertilizing,  and 
not  even  those  elements  which  are  contained  in  the  stalks  and  leaves 
are  restored  to  the  land.  But  after  a  series  of  years  even  the  rich- 
est sugar  land  begins  to  show  a  declining  yield.  Then,  however,  the 
planter  turns  to  fresh  plots,  and  the  same  process  begins  over  again. 
It  will  continue  until  no  more  fresh  land  is  available;  for  predatory 
cultiyatioii^^o  long  as  the  land  holds  out,  is  the  most  profitable. 

Such  has  commonly  been  the  first  stage  of  agriculture  in  the 
United  States,  especially  on  the  fertile  lands  of  the  Mississippi 
Valley  and  the  West.  The  usual  crop  has  been  wheat,  because  of 
the  universal  demand  for  that  staple  and  its  easy  transportation. 
In  this  pioneer  stage,  wheat  is  grown  year  after  year,  with  no 
manuring  or  little  of  it,  and  often  with  burning  of  the  straw. 
Where  the  soil  is  rich  in  humus,  such  use  of  it  can  be  maintained 
for  ten  or  fifteen  years  and  sometimes  for  an  even  longer  period. 
Yet  in  time  the  signs  of  approaching  exhaustion  appear.  The  land 
no  longer  yields  as  before;  it  must  have  a  "rest"  or  be  "nursed"; 
and  the  farmer  must  either  turn  to  plots  of  virgin  soil,  or  cultivate 
the  old  with  the  conservation  of  its  capabilities.  In  the  United 
States  this  transition  has  often  been  accompanied  with  a  change 
in  ownership.  The  pioneer  sells  his  worn-out  land  —  not  yet  in 
reality  much  worn  out,  but  simply  in  need  of  careful  husbandry  — 
to  a  newcomer,  not  infrequently  a  German  or  Scandinavian,  who 
is  habituated  to  more  complex  ways  of  cultivation;  while  the  pio- 
neer himself  moves  farther  West,  again  takes  up  virgin  soil,  and 
repeats  the  old  round. 

Predatory  cultivation  is  one  phase  of  extensive  cultivation;  it 
stands  in  contrast  with  the  intensive  cultivation  of  England, 
France,  Germany,  and  most  parts  of  Europe.  Extensive  cultiya- 
tion  means  that  labor  and  capital  are  spread  comparatively  thin. 
The  yield  per  acre  is  commonly  small.  Thus  the  average  yield  of 
wheat  per  acre  in  the  United  States  is  between  12  and  15  JiU^ls. 
In  England,  the  average  is  25  bushels  and  more.  But  the  yield 
per  unit  of  labor  and  capital  is  smaller  in  England;  for  much  more 
labor  is  applied  to  each  acre.    A  farm  of  one  hundred  and  sixty 

J 


42-§5]  RENT,  AGRICULTURE,  LAND  TENURE  75 

acres  in  the  typical  agricultural  regions  of  the  United  States  —  say 
in  the  North  Central  states  —  is  tilled  by  the  owner  and  his  family, 
with  possibly  one  hired  laborer,  A  farm  of  the  same  size  in  Great 
Britain  is  tilled  by  the  capitalist  farmer  employing  a  whole  staff  of 
farm  laborers. 

Extensive  cultivation,  however,  is  not  necessarily^  predatory 
cultivation.  Labor  and  capital  may  be  spread  thin  on  the  soil,  yet 
nevertheless  may  be  applied  with  care  and  with  due  conservation 
of  the  elements  of  fertility.  In  the  United  States,  the  first  stage 
of  pioneer  or  predatory  cultivation  —  lasting  perhaps  for  ten  or 
even  twenty  years  —  is  usually  succeeded  by  more  careful,  but  still 
extensive  tillage.  Most  of  the  land  in  the  upper  Mississippi 
Valley  is  now  in  its  second  stage.  It  may  be  expected  that,  as 
population  thickens  and  the  resort  to  the  new  land  becomes  more 
and  more  difficult,  a  gradual  transition  will  take  place  toward  the 
stage  of  high  farming  or  intensive  cultivation.  More  elaborate 
rotation  of  crops,  more  continuous  use  of  each  tract,  deeper  plowing, 
more  frequent  harrowing,  systematic  drainage,  more  abundant  and 
more  carefully  selected  fertilizers,  will  be  used,  as  they  now  are  in 
the  advanced  countries  of  Europe.  This  change  is  due  to  the  ten- 
dency to  diminishing  returns,  and  is  a  sign  that  the  conditions  of 
pressure  on  the  land  have  been  reached.  High  farming  is  essential 
to  maintain  the  productivity  of  the  land  if  large  returns  are  sought 
from  it;  but  it  means  that  those  large  returns  are  got  with  some 
difficulty,  and  that  the  limit  to  the  possibilities  of  increase  is  begin- 
ning to  be  approached. 

In  any  case,  as  the  land  of  a  country  is  used  more  and  more,  its 
efficacy  as  an  agent  for  production  depends  in  greater  and  greater 
degree  on  what  man  has  done  for  it.  ,  Those  lands  which  were 
originally  best  have  been  denuded  somewhat  of  their  natural  stores. 
Those  which  were  originally  less  good  have  been  brought  nearer 
the  average  by  continued  careful  cultivation.  All  have  been 
leveled,  drained,  fenced,  freed  from  large  stones,  and  provided 
with  roads.  The  differences  between  plots  are  thus  less  great,  the 
longer  they  have  been  in  use;  and  in  old  countries  there  is  a  tendency 
to  bring  all  land  to  something  like  the  same  state. 


76  THE   DISTRIBUTION    OF  WEALTH  l42-§5 

From  this  it  might  be  inferred  that  inherent  differences  in  land 
cease  to  be  of  importance.  But  the  conclusion  by  no  means  fol- 
lows. It  is  true  that  all  land  needs  careful  use,  and  depends  on 
man's  action  for  the  maintenance  of  its  fertility;  but  all  does  not 
respond  to  man's  action  with  the  same  ease  or  to  the  same  degree. 
Land  with  a  deep  layer  of  humus  contains  very  rich  stores  of  latent 
plant  food,  not  easily  transferred  to  the  plant,  yet  capable  of  being 
utilized  almost  indefinitely  if  only  there  be  restorative  cultivation. 
The  physical  constitution  of  land  —  in  what  proportions  it  contains 
sand,  clay,  humus  —  has  an  important  influence  on  its  possibilities 
for  tillage.  Tho  a  sandy  waste  or  barren  hillside  may  be  brought 
to  a  state  of  high  yield  by  continued  care  and  remaking,  it  cannot  be 
brought  to  that  state  or  maintained  there  with  as  little  labor  as  land 
having  better  natural  endowment.  New  England  can  never  be  made 
as  fertile  as  Illinois  and  Kentucky.  Climate,  again  —  smishine, 
temperature,  and  precipitation  —  is  an  important  cause^f  endur- 
ing differences.  The  newly  opened  land  in  the  Canadian  North-"^ 
west,  for  example,  of  which  so  much  has  been  said  in  recent  years, 
seems  to  be  well  adapted  for  wheat  growing,  and  promises  for  a  long 
series  of  years  to  give  profitable  opportunities  for  pioneer  cultiva- 
tion. But  when,  after  perhaps  a  generation,  the  inevitable  stage 
of  restorative  cultivation  is  reached,  its  possibilities  will  be  found 
less  than  that  of  the  land  in  the  milder  regions.  Land  that  is  frost 
bound  thru  the  larger  part  of  the  year  is  not  a  flexible  instrument 
and  will  not  readily  respond  to  more  intensive  cultivation.  In  the 
semi-arid  regions  of  the  Western  states  —  those  stretches  in  Ne- 
braska, Kansas,  Texas,  which  lie  intermediate  between  the  well- 
watered  Mississippi  Valley  and  the  arid  plains  of  Wyoming,  Colo- 
rado, and  New  Mexico  —  it  is  said  that  "dry  farming,"  in  the  way 
of  deeper  plowing,  careful  harrowing  and  rolling,  specially  selected 
seeds,  will  remove  climatic  obstacles  long  thought  insuperable. 
Whether  or  no  these  expectations  are  fulfilled,  it  is  certain  that 
more  labor  will  need  to  be  applied  in  those  regions  than  in  the 
Mississippi  Valley,  where  nature  provides  ample  moisture. 

Tho  inherent  differences  in  fertility  thus  persist,  it  is  true  that 
on  all  land  which  has  long  been  in  use  there  is  difficulty  in  deter- 


42-§6]  RENT,  AGRICULTURE,  LAND  TENURE  77 

mining  how  much  the  yield  is  affected  by  its  "original  and  inde- 
structible powers,"  how  much  by  qualities  supplied  thru  man's 
action.  Economic  rent  is  extremely  difficult  to  mark  off.  Beyond 
question  it  is  present  on  some  sites:  thus  on  bottom  lands  in  our 
Western  valleys,  where  the  layer  of  humus  is  extraordinarily  deep, 
or  (by  virtue  of  situation)  on  convenient  sites  for  market  gardens 
close  to  great  cities.  We  may  be  certain  that  on  other  lands  there 
is  little  or  none  of  it  —  on  the  rocky  pastures  of  New  England  or 
on  the  Highlands  of  Scotland.  But  on  any  particular  plot  which 
has  been  long  under  cultivation  it  is  almost  impossible  to  say  how 
much  labor  is  aided  by  the  improvements  made  by  man,  how  much 
by  inherent  properties. 

When  once  permanent  improvements  have  been  embodied  in  the 
land,  their  effect  is  precisely  the  same  as  if  nature  had  made  the 
land  good.  Subsoil  draining,  for  example,  which  has  been 
applied  on  a  great  scale  in  Ohio,  Indiana,  Illinois,  and  other  states 
where  the  pioneer  stage  has  been  passed,  means  an  irrevocable 
investment.  \Mien  the  drains  are  in,  it  is  as  if  nature,  not  man, 
had  provided  the  best  means  of  admitting  moisture  and  of  dis- 
charging the  harmful  excess.  So  it  is  when  great  operations  for 
drainage  are  undertaken  —  as  on  the  Bedford  Level  in  England, 
or  the  tracts  on  the  Mississippi  River  along  the  boundary  between 
Missouri  and  Arkansas.  Extensive  areas,  high  in  the  elements  of 
fertility,  have  thus  been  freed  from  excessive  moisture.  Once  these 
improvements  are  made,  the  return  on  the  land  depends  on  the 
principles  of  rent  rather  than  on  those  of  interest.  It  depends  once 
for  all  on  the  productive  quality  of  the  land  as  it  stands  after  the 
improvement.  1 

§  6.  The  leasing  of  land  and  the  payment  of  "rent"  in  the  usual 
sense  does  not  necessarily  imply  the  existence  of  economic  rent. 
What  the  tenant  pays  may  be  no  more  than  the  ordinary  return, 
in  the  way  of  interest,  on  improvements  made  by  the  owner. 
But  commonly  the  actual  payment  contains  something  of  economic 
rent  as  well  as  of  return  on  capital.  Tenancy  raises  some  inde- 
pendent questions.  ^ 

»  Compare  what  is  said  bdow,  Chapter  43,  §  4. 


78  THE  DISTRIBUTION  OF  WEALTH  l42-§  6 

Almost  always  tenancy  Is  an  obstacle  to  the  best  use  of  the  land; 
for  the  tenant  is  concerned  only  with  getting  out  of  it  what  he  can 
during  his  term,  and  is  tempted  to  employ  predatory  methods.  In 
its  barest  form,  where  the  landlord  does  nothing,  and  the  land  is 
simply  let  to  the  tenant  from  year  to  year,  it  results  not  only  in  bad 
tillage  but  in  demoralized  tillers.  Such  was  the  outcome  of 
V  cottier  holdings  in  Ireland,  maintained  there  for  centuries  in  the 
^  dealings  between  alien  landlords  and  an  oppressed  and  ignorant 
f  tenantry.  The  situation  is  better  where  there  is  fixed  tenure  in 
the  form  of  long  leases,  with  provisions  for  compensation  to  tenants 
for  improvements  made  by  them  and  not  exhausted  on  the  expira- 
tion of  the  lease.  Even  under  this  arrangement  the  landlord  must 
have  a  care  for  the  way  in  which  the  soil  is  used,  and  usually  makes 
stipulations  regarding  the  rotation  of  crops  and  the  maintenance  of 
improvements.  Yet  these  very  stipulations,  if  detailed,  hamper 
the  tenant  unduly.  In  England,  a  practise  of  short  leases  (usually 
from  year  to  year)  has  been  carried  on  without  much  ill  effect, 
because  landlord  and  tenant  have  been  virtually  partners.  The 
English  farmer  is  a  person  of  some  means,  who  leases  a  considerable 

t  tract  of  land  and  is  prepared  to  cultivate  it  systematically  for  an 
extended  period,  relying  on  renewal  of  his  lease  at  equitable  terms 
so  long  as  his  husbandry  is  good.  The  landlord  himself  makes  per- 
manent improvements  and  is  thus  an  investor  in  the  land.  The 
actual  payment  made  to  the  landlord  represents  economic  rent 
only  in  part.  Traditions  of  friendliness  and  fair-minded  dealing 
between  the  two  have  made  this  arrangement  a  workable  one;  and 
indeed  the  agricultural  arts  in  England  have  reached  a  high  degree 
of  advancement  under  them.  In  Scotland  long  leases,  sometimes 
for  twenty-one  years,  are  common  and  under  them  perhaps  the 
most  refined  forms  of  intensive  cultivation  have  been  developed. 

None  the  less,  the  most  effective  use  of  the  land  is  likely  to  be 
made  by  the  owner.  Such  at  all  events  is  the  case  where  land  is 
readily  transferable,  and  so  can  be  bid  for  and  secured  by  those 
who  know  how  best  to  make  use  of  it.  This  facility  is  lacking  in 
many  European  countries,  especially  England  and  France;  where, 
moreover,  the  obstacles  which  the  state  of  the  law  presents  are 


Vfrry  >•" 


42-§6]  RENT,  AGRICULTURE,  LAND  TENURE  79 

increased  by  the  social  prestige  which  often  attaches  to  large 
landed  estates  and  makes  the  owners  reluctant  to  sell.  In  the 
United  States  none  of  these  obstacles  exist.  Here,  at  least  in  the 
northern  part  of  the  country,  most  land  is  tilled  by  the  owners. 
Farms  are  constantly  passing  from  one  hand  to  another,  according 
as  varying  possibilities  of  cultivation  are  perceived  by  different  per- 
sons —  a  condition  which  promotes  the  most  productive  utiliza- 
tion of  the  soil.  In  the  North  Central  states,  the  great  agricul- 
tural region  of  the  country,  about  sixty  per  cent  of  the  farms  are 
tilled  by  their  owners.  Since  the  opening  of  the  twentieth 
century  there  has  been  some  increase  of  tenancy  in  this  region,  and 
in  the  North  generally.  But  the  increase  is  largely  due  to  the 
efforts  of  younger  men  to  swing  themselves  into  the  position  of 
owners  —  a  process  which  takes  time  in  those  sections  where  land 
commands  a  high  price  and  where  a  considerable  sum  in  hand  is 
required  to  buy  it  outright.  Notwithstanding  the  increase  in  ten- 
ancy, the  conditions  of  land  holding  in  the  northern  parts  of  the 
United  States  are  satisfactory.  The  same  is  true  of  many  parts  of 
Germany,  and  especially  Southern  and  Western  Germany,  where 
the  percentage  of  land  ownership  is  also  high. 

A  not  uncommon  form  of  tenure  in  the  southern  part  of  Europe 
—  notably  in  Italy  —  is  metayer  tenure.  The  land  is  let  for  a 
share  of  the  crop;  often  one  half  of  the  crop,  but  more  or  less  accord- 
ing to  the  fertility  of  the  soil  and  the  extent  of  the  landlord's  other 
contribution.  The  landlord  himself  provides  part  of  the  capital 
used.  Metayer  tenure  has  the  advantage,  as  compared  w^ith 
hired  labor,  of  stimulating  the  cultivator  to  get  from  the  land 
as  much  as  possible;  but  evidently  with  the  drawback  which 
comes  from  the  fact  that  the  landlord  also  shares  in  the  output. 
In  the  southern  part  of  the  United  States  there  is  a  widespread 
practise  of  share  tenancy  among  the  negroes.  The  owners  of 
the  land  here  contribute  a  very  large  part  (sometimes  all)  of  the 
advances  needed  by  the  tenants:  not  only  seed,  implements, 
animals,  but  even  the  food  of  the  negroes.  This  arrangement 
was  doubtless  inevitable  under  the  conditions  in  which  the  South- 
ern states  found  themselves  at  the  close  of  the  Civil  War,  the 


Y 


x/ 


« 


Y         THE  DISTRIBUTION  OF  WEALTH  [42-§7 

fj-eedmen  being  destitute  alike  of  means  and  of  any  experience  in 
agricultural  management.  Yet  it  is  not  comparable  in  social 
%3vantage  with  complete  ownership  by  those  who  work  on  the  soil. 
It  is  inferior  also  to  leases  at  a  fixed  money  rent,  where  the  leases  are 
so  adjusted  as  to  bring  security  of  tenure  and  encouragement  to 
improvement.  A  wide  diffusion  of  the  ownership  of  land  and  a 
predominance  of  cultivation  by  the  owners  are  the  most  whole- 
some agricultural  conditions;  and  it  is  much  to  be  wished  that 
these  conditions  which  fortunately  prevail  over  the  greater  part  of 
the  United  States,  should  develop  in  the  Southern  states  also. 

§  7.  The  considerations  which  have  been  adduced  in  the  pre- 
ceding sections  —  the  need  of  conserving  the  fertility  of  the  land, 
the  growing  importance  of  man's  action  as  cultivation  becomes 
more  intensive,  the  difficulty  of  distinguishing  between  nature's 
endowment  and  artificial  improvements  —  have  an  important 
bearing  on  some  social  problems. 

It  has  been  proposed  to  confiscate  economic  rent  for  the  benefit 
of  the  community.  Rent  is  a  surplus  over  and  above  what  is 
necessary  to  induce  investment,  an  unearned  increment,  tending 
to  rise  as  growing  population  leads  to  greater  demands  oji  the  soil. 
Why  should  the  individual  landowner  keep  it?  Under  the  so- 
called  "single  tax,"  it  is  proposed  that  all  land  be  taxed  to  the  full 
amount  of  its  economic  rent;  the  tax  being  called  single,  because  it 
is  expected  that  so  much  revenue  would  be  secured  for  the  public 
as  to  enable  all  other  levies  to  be  dispensed  with.  Substantially 
the  same  result  would  be  attained  if  the  community  were  to  take 
possession  of  the  land  once  for  all,  never  part  with  the  title,  and  let 
the  land  to  tenants  for  the  amount  of  its  rent  —  allowing  the 
tenant  to  keep  for  himself  enough  to  pay  for  all  his  improvements 
and  for  interest  on  them,  but  requiring  payment  of  the  excess. 

One  fundamental  obstacle  in  the  way  of  this  program  of  action 
is,  as  regards  agricultural  land,  the  difficulty  of  measuring  the  in- 
vestment made  in  the  soil  and  the  normal  return  on  it.  Rent,  as 
has  been  remarked,  does  not  arise  spontaneously.  It  is  nQt_earr 
marked  as  a  sej>arate  return.  Its  emergence  is  inextricably  inter-* 
mixed  with  the  complex  processes  of  tilling  the  soil  and  of  main- 


42-§7]  RENT,  AGRICULTURE,  LAND  TENURE  81 

taining  its  fertility.  For  the  effective  use  of  the  land,  there  must 
be  elaborate  application  of  labor,  much  experimenting,  plans  of 
cultivation  that  run  over  a  long  period;  not  least,  constant  indi- 
vidual watchfulness  and  care.  No  stimulus  to  the  best  use  of  land 
is  comparable  to  that  which  comes  from  secure  possession,  from  the 
certainty  that  he  who  makes  it  yield  abundantly  will  reap  the 
results  of  hi&  industry.  And  no  kind  of  secure  possession  is  so 
effective  to  this  end  as  untrammeled  ownership.  It  is  true  that  by 
private  ownership  the  community  loses  something  which,  if  dis- 
creetly carved  out,  might  be  appropriated  without  discouraging 
good  management;  but  the  difficulties  of  discreet^  carving  are  so 
serious  and  the  need  of  good  management  so  great  that  the 
balance  of  social  gain  is  against  any  scheme  of  taxation  or  periodic 
appropriatioiT."^"  '    "••*•..  .-i. 

There  is  something  attractive  in  the  proposal  that  the  community 
should  never  part  with  its  title  to  the  land,  but  should  lease  it  only 
—  lease  it  for  long  terms,  in  such  manner  as  to  give  tenants  free 
scope  for  improvements  and  no  inducement  to  impoverish  the  soil, 
and  yet  to  bring  back  to  the  community  in  the  end  the  gradually 
increasing  increment  of  economic  rent.  If  the  country  had  started 
from  the  outset  on  this  plan,  and  if  its  goverimient  were  rigidly 
honest,  highly  intelligent^  and  excellently  administered,  this  mode 
of  managiiigHtS'"'''patrimony  would  be  preferable  to  private 
ownership.  But  no  country  has  started  on  this  plan;  or  if  it  has 
done  so  (the  historians  are  uncertain  as  to  the  extent  to  which  the 
Germanic  races  began  with  a  system  of  true  communal  ownership), 
long  centuries  of  private  ownership  have  followed.  The  spur  of 
ownership  was  historically  indispensable  for  the  advance  of  the 
agricultural  arts.  It  is  conceivable  that  where  a  civilized  com- 
munity, equipped  with  the  accumulated  experience  of  centuries, 
takes  possession  of  new  land  —  as  in  the  United  States,  Canada, 
Australia  —  it  might  retain  in  public  ownership  the  fee  of  the  land, 
parting  only  with  long  leaseholds.  But  it  is  precisely  the  fee  which 
the  pioneer  generations  covet.  The  thought  of  the  conservation 
of  the  interests  of  the  coming  generations  rarely  presents  itself  to 
them;  or,  if  it  does,  they  think  of  their  own  direct  descendants  only. 


82  THE  DISTRIBUTION  OF  WEALTH  [42-§7 

not  of  the  indiscriminate  mass  of  the  later  population.  Hence  all 
communities,  whether  they  have  moved  slowly  thru  a  long  historical 
development  or  have  begun  at  once  on  the  plane  of  advanced 
civilization,  have  rested  their  industrial  organization  on  private 
ownership  of  land.  Land  then  has  been  bought  and  sold  for 
centuries  on  the  supposition  that  the  property  rights  which  have 
existed  from  time  immemorial  will  be  maintained  indefinitely  into 
the  future.  To  destroy  all  these  acquired  rights  is  not  indeed 
unthinkable,  but  it  would  involve  a  reconstruction  of  the  whole 
framework  of  society.  It  presents  the  problem  of  socialism,  not 
of  the  appropriation  of  the  unearned  increment. 

A  different  proposal  is  that  to  appropriate,  not  the  whole  of  the 
unearned  increment,  but  the  future  accretions.  Let  vested  rights 
—  the  private  ownership  of  land  and  the  enjoyment  of  existing 
rents  —  remain  undistiu-bed.  But  take  for  society  at  large  the 
increase  of  rents  that  will  arise  hereafter.  There  can  be  no  objec- 
tions in  principle  to  this  proposal.  The  sole  question  is  whether 
it  will  on  the  whole  bring  gain  to  the  community.  To  carve  out 
economic  rent  proper  and  to  leave  undisturbed  those  gains  which 
are  necessary  to  secure  the  effective  use  of  the  land,  calls  for  high 
intelligence  as  well  as  scrupulous  honesty  among  the  public  officials. 
A  dull  or  corrupt  administration  of  so  delicate  a  function  would 
work  great  harm  and  indeed  would  probably  lead  before  long  to  the 
summary  abandonment  of  the  whole  scheme.  It  is  to  be  borne  in 
mind,  however,  that  where  the  ownership  of  land  is  much  diffused, 
a  wide  dispersion  of  economic  rent  takes  place,  and  those  extreme 
inequalities  are  avoided  which  are  the  most  objectionable  results  of 
the  regime  of  private  property.  All  things  considered  —  admin- 
istrative difficulties  and  the  imperfections  of  government,  as  well 
as  strictly  economic  factors  —  the  balance  of  gain  is  probably  in 
favor  of  the  untrammeled  right  of  private  ownership  in  agricul- 
tural land,  and  of  such  legislative  changes  only  as  facilitate  its  free 
transfer  and  its  easy  acquisition  by  those  who  will  use  it  best. 


CHAPTER  43 
Urban  Site  Rent 

Section  1.  How  rent  arises  on  sites  for  retail  trading,  wholesale  trading, 
manufactures,  dwellings,  S3  —  Sec.  2.  The  principle  of  diminishing 
returns  on  urban  sites;  its  operation  less  steep  than  for  agricultural  land, 
87  —  Sec.  3.  Site  rent  depends  upon  shrewdness  in  utilization.  The 
activity  of  real  estate  speculators,  89  —  Sec.  4.  When  capital  is  sunk 
irrevocably  in  the  soil,  there  is  difficulty  in  separating  rent  from  return 
on  capital.  How  far  ground  rent  is  identical  with  economic  rent,  91  — 
Sec.  5.  How  far  the  activity  of  real  estate  dealers  and  speculators  is  pro- 
ductive, 94  —  Sec.  6.  Urban  rent  is  sometimes  deliberately  created;  is  it 
then  economic  rent?  95. 

§  1.  Urban  rent  resembles  in  essentials  the  rent  of  agricultural 
land.  Like  that,  it  results  from  the  differential  advantages  of 
certain  plots.  The  application  of  capital  and  labor  on  some  sites 
yields  greater  returns  than  on  others.  So  long  as  the  possibilities 
of  production  on  the  better  sites  are  limited,  the  owners  are  subject 
to  a  restricted  competition  only,  and  can  retain  the  extra  return  for 
themselves;  and  this,  irrespective  of  whether  they  utilize  the  sites 
themselves,  or  let  them  to  others. 

The  cause  and  the  extent  of  the  differential  advantage  of  urban 
land  can  best  be  elucidated  by  a  consideration  of  the  various  ways 
in  which  the  land  is  used.  Most  characteristic,  and  simplest  in  its 
manifestations,  is  the  case  of  sites  used  for  retail  trading.  Wher- 
ever throngs  of  people  habitually  pass,  retail  operations  can  be 
conducted  with  most  advantage.  Enter  a  great  shop  in  the  heart 
of  a  city,  and  observe  what  goes  on.  The  selling  clerks  are  con- 
tinuously busy;  the  turnover  of  capital  is  large  and  quick;  the 
building  and  all  its  appliances  are  in  constant  effective  use.  Con- 
trast the  scene  with  the  village  shop,  where  the  shopkeeper  lolls 
about  during  the  greater  part  of  the  day,  waiting  for  a  customer; 
or  (if  he  be  energetic)  has  ample  time  for  attending  to  other  things 
also.    For  each  unit  of  labor  and  capital  applied,  the  product  is 

83 


84  THE  DISTRIBUTION  OF  WEALTH  [43-§  1 

vastly  greater  on  the  city  site.  By  "product,"  in  the  case  of  the 
shop,  we  mean  the  contribution  to  the  community's  income  of 
utiHties  or  satisfactions  —  the  completion  of  what  is  usually  the 
last  stage  in  the  process  of  getting  commodities  into  consumers' 
hands.  In  everyday  speech,  the  same  thing  is  expressed  by  saying 
that  in  the  one  place  much  business  can  be  done  and  in  the  other 
very  little. 

The  precise  reasons  why  some  sites  are  better  than  others  for 
retail  trading  are  sometimes  simple,  sometimes  obscure.  Most 
simple  are  accessibility  and  familiarity.  The  places  where  urban 
transportation  lines  converge  are  the  most  valuable  for  retail  trade. 
From  such  centers  the  retail  streets  commonly  radiate,  those  being 
most  advantageous  along  which  the  largest  number  of  persons  move 
to  and  fro  in  their  daily  tasks.  Anything  which  causes  many  per- 
sons to  betake  themselves  to  a  given  point  —  a  railway  station,  a 
post  office,  a  theatre  —  gives  the  neighboring  sites  an  advantage 
for  retail  trading.  Less  simple  are  the  effects  of  tradition,  or  of 
proximity  to  the  dwellings  of  the  well-to-do,  or  of  the  initiative  of 
a  few  skillful  dealers,  by  which  one  street  or  region  rather  than 
another  may  come  into  vogue  for  shops  of  the  more  expensive  kind 
and  its  profitableness  may  for  that  reason  become  greater.  Dis- 
play has  a  great  part  in  attracting  customers  (it  is  a  cardinal 
maxim  of  the  retailer  that  his  windows  must  show  his  goods) ;  hence 
the  southern  side  of  the  street,  where  goods  can  be  put  into  show 
windows  with  most  effect  and  with  least  danger  of  spoiling,  often 
has  an  advantage  over  the  northern  and  commands  a  higher  rent. 

The  prices  of  the  commodities  sold  on  the  expensive  sites  are  not 
usually  higher.  Here,  as  in  the  case  of  agricultural  land,  rent  is 
not  a  cause  of  high  price.  It  is  the  result  of  the  facilities  for  sell- 
ing many  things  at  the  usual  prices.  The  so-called  department 
store  sells  its  wares  at  prices  at  least  as  low  as  those  of  the  suburban 
or  village  shop.  To  this  statement  there  seems,  indeed,  to  be  an 
exception  in  the  case  of  those  shops  which  make  their  appeal  to  the 
rich,  and  to  persons  who  ape  the  ways  of  the  rich.  Here  a  given 
article  is  not  infrequently  sold  at  a  price  higher  than  that  charged 
on  less  pretentious  premises  within  a  stone's  throw.     Here  high 


43-§l]  URBAN  SITE  RENT  85 

prices  and  high  rents  go  together;  and  the  dealers,  if  asked,  would 
certainly  explain  the  connection  between  the  two  by  saying  that, 
having  to  pay  high  rents,  they  must  charge  higher  prices.  But  in 
reality  the  causal  connection  runs  the  other  way ;  it  is  because  they 
can  get  high  prices  that  they  bid  high  for  the  premises  and  pay  the 
high  rents.  In  shops  of  this  character  there  is  usually  a  stock  of 
well-selected  and  attractively  arranged  articles  of  good  quality; 
there  is  quiet,  and,  not  least,  there  is  a  flattering  of  the  purchaser's 
vanity  by  obsequious  demeanor  and  by  a  suggestion  of  superior 
company.  The  satisfaction  of  the  snobbish  love  of  distinction  is 
one  of  the  utilities  here  pur\eyed,  and  is  one  for  which  most  people 
are  willing  to  pay  handsomely. 

Sites  for  wholesale  trading  command  their  rentals  largely  because 
pf  their  proximity  to  other  sites  where  the  same  or  similar  busi- 
nesses are  carried  on.  This  advantage  may  seem  a  trifling  one, 
especially  in  these  days  of  the  telephone.  Yet  where  trading  is 
done  on  a  great  scale,  a  few  hundred  dollars  more  or  less  paid  for 
rent,  or  even  a  few  thousand,  do  not  signify  much  in  the  general 
account,  and  the  facilitation  of  larger  dealings  leads  to  the  ready 
payment  of  a  high  premium  for  the  convenient  sites.  Here  every 
sort  of  negotiator  can  run  in  promptly;  banks,  brokers,  shipping 
agents,  insurance  companies,  are  close  by.  Wholesale  dealers  in 
the  same  trade  commonly  are  near  each  other;  in  a  great  city  there 
is  the  metal  district,  the  dry  goods  district,  the  boot  and  shoe  dis- 
trict, the  shipping  district,  and  so  on.  All  together  cluster  about 
the  financial  center,  which  in  turn  gets  its  advantage  from  being  in 
close  touch  with  any  and  every  kind  of  business.  The  most  various 
sorts  of  persons  who  need  to  be  where  they  can  easily  get  at  their 
customers  and  where  their  customers  can  easily  get  at  them,  bid 
for  premises  near  the  heart  of  things;  such  as  lawyers,  brokers, 
schemers  and  middlemen  of  all  kinds,  the  managers  and  represen- 
tatives of  manufacturing  establishments.  Hence  the  office  build- 
ing, developed  to  perfection  in  American  cities.  The  largest  urban 
rents  seem  to  be  vsecured,  at  least  in  American  cities,  on  sites  used_ 
for  offices,  for  financial  enterprises,  and  for  the  great  retail  shops. 
They  sometimes  reach  an  extraordinary  range.     An  acre  of  land 


86  THE  DISTRIBUTION  OF  WEALTH  [43-§  1 

in  the  financial  center  of  New  York  City  had  about  1910  a  capital 
value  of  roughly  $20,000,000,  representing  a  net  rental  of  $800,000 
a  year. 

Manufacturing  sites  sometimes  command  their  price  because  of 
intrinsic  advantages.  They  may  be  near  water  power,  or  a  deep- 
water  harbor,  or  cheap  fuel  and  materials.  Facilities  fof ^^ans- 
portation  by  railway  tell  no  less  than  water  facilities.  In  the 
United  States,  so  long  as  competition  among  railways  was  active 
and  railway  rates  were  lower  if  one  line  could  be  played  off  against 
another,  a  spot  atLwhich  several  lines  met  had  advantages  in  much 
the  same  way  as  if  nature  had  made  the  site  good.  When  once  a 
city  has  developed,  it  continues  to  attract  manufacturing  estab- 
lishments, for  reasons  that  are  often  not  apparent  on  the  surface. 
f  Why  should  a  premium  be  paid  for  urban  premises  when  sites 
^  apparently  no  less  good  can  be  had  at  much  lower  rentals  in  the 
/  country?  Here,  too,  the  telephone  would  seem  to  remove  the  draw- 
backs entailed  by  remoteness.  And  yet  the  keen  calculations  of 
shrewd  business  men,  constantly  weighing  the  advantage  of  prox- 
imity against  a  higher  rent  charge,  cause  the  gravitation  of  many 
manufactures  to  the  urban  centers  and  the  suburbs  close  to  them. 
Easy  access  to  customers,  to  supplies,  to  subsidiary  industries,  even 
to  competitors,  is  one  factor.  Probably  most  important  is  the 
plentifulness  and  flexibility  of  the  labor  supply,  to  which  reference 
has  already  been  made,^  and  which  is  of  particular  moment  in 
establishments  whose  work  is  subject  to  rapid  fluctuations. 

The  precise  point  at  which  a  city's  business  operations  will  con- 
centrate and  at  which  urban  rents  will  be  highest,  is  often  deter- 
mined by  no  natural  or  inherent  causes.  The  site  of  a  great  city 
_jtself  is  indeed, usually  fixed  by  natural  advantages,  such  as  a 
superb  harbor,  as  in  the  case  of  New  York  City  and  San  Francisco, 
or  the  confluence  of  rivers  in  the  neighborhood  of  great  coal  sup- 
plies, as  Pittsburg,  or  access  to  inland  water  routes,  as  Chicago. 
But  within  the  city  there  is  usually  no  reason  why  one  small  area 
should  be  preferred  to  others  as  superior  for  business.  It  is  the 
■  gregariousness  of  industry  that  gives  business  sites  their  value, 

1  See  Chapter  14,  S  2. 


43-§2]  URBAN  SITE  RENT  87 

just  as  the  gregariousness  of  men  has  the  same  effect  on  sites  for 
dwelhngs.  Some  one  center  will  be  resorted  to  by  all,  and  will  be 
prized  by  all;  but  the  causes  which  fixed  the  center  at  Threadneedle 
Street  or  Wall  Street  are  usually  historical  and  complex,  and  some- 
Jimes  wtjjmsicaL 

The  value  of  sites  for  dwellings  is  explained  by  the  same  prin- 
ciple, with  similar  complexities  and  similar  apparent  anomalies. 
Sometimes  such  sites  have  intrinsic  advantages  —  broad  and 
sunny  streets,  frontage  on  parks  and  open  spaces,  convenience  of 
access.  But  often  the  advantage  is  purely  factitious.  Nearness 
to  one's  kind  is  in  many  cases  alone  sufficient  to  explain  the  demand 
for  some  spots.  Crowded,  noisy,  and  unhealthful  city  streets 
attract  the  working  classes  more  than  quiet  lanes  in  the  country. 
At  the  other  end  of  the  social  scale,  among  the  well-to-do,  and  most 
of  all  among  the  very  rich,  snobbish  difierences  tell  enormously. 
Certain  streets  are  resorted  to  by  those  who  have  social  distinction. 
Thither  flock  all  who  yearn  for  such  distinction  —  a  great  and  grow- 
ing multitude  —  and  sites  believed  to  be  proper  for  the  select  are 
paid  for  at  rentals  limited  only  by  their  incomes.  The  very  cracks 
and  crannies  of  fashionable  districts,  narrow  side  streets  and  dark 
back  rooms,  when  touched  by  this  potent  charm,  command  high 
rentals,  notwithstanding  their  intrinsic  unattractiveness. 

§  2.  Something  closely  analogous  to  the  tendency  to  diminish- 
ing  returns  shows  itself  on  urban  sites. 

Buildings  can  be  pushed  higher  almost  without  limit.  In  these 
modern  days  of  steel-frame  construction,  ten,  twenty,  thirty, 
stories  are  practicable.  But  sooner  or  later  the  stage  is  reached 
where  the  gain  from  additions  to  the  structure  begins  to  diminish, 
and  where  it  becomes  a  question  whether  it  is  not  better 
to  resort  to  building  on  another  site  than  to  push  construction 
further  on  the  same  site.  Where  the  land  is  used  for  manufactur- 
ing or  mercantile  operations,  that  stage  seems  to  be  reached,  in 
American  cities,  with  the  sixth  or  eighth  floor.  One  rarely  sees  a 
building  of  greater  height  used  for  these  purposes.  The  poorer 
light  and  air  on  the  lower  floors,  the  cost^  lifting  goods  and 
materials  (even  with  smooth-running  elevators),  the  difiiculties  of 


88  THE  DISTRIBUTION  OF  WEALTH  l43-§2 

supervision,  begin  to  tell,  and  tell  the  more  as  more  stories  are 
added.  Wliere  buildings  are  used  for  office  purposes  in  the  busi- 
ness centers  of  great  cities  they  are  often  pushed  much  higher,  at 
least  in  the  United  States.  The  advantage  of  being  at  the  very 
heart  of  things  is  so  great  that  a  multitude  of  persons,  engaged  in 
all  sorts  of  occupations,  are  willing  to  pay  liberally  for  this  facility; 
and  a  small  city  in  itself  is  established  in  the  towering  office  build- 
ing. But  even  here  there  is  eventually  a  limit,  tho  one  which  the 
progress  of  invention  is  steadily  pushing  higher.  It  must  be  borne 
in  mind,  in  any  case,  that  all  the  sites  cannot  be  used  in  this  way, 
for  then  the  buildings  would  cut  off  too  much  of  each  other's  light 
and  air.  Hence  adjoining  sites  must  be  controlled  and  limited;  in 
other  words,  taking  the  combined  sites,  the  possibility  of  inten- 
sive use  is  much  more  limited  than  it  appears  to  be  when  a  single 
plot  is  considered  by  itself.  Situations  on  a  corner,  or  those  which 
face  a  public  square  or  other  open  space  (like  Trinity  churchyard 
on  Broadway  in  New  York  City),  offer  the  possibility  of  investing 
an  enormous  capital  on  a  given  area. 

Much  the  same  is  true  where  dwellings  are  put  on  urban  land. 
Here,  also,  buildings  can  be  made  taller,  thus  securing  very  inten- 
sive use  of  sites  advantageously  situated  in  large  cities.  Dwellings 
for  the  very  poor  as  well  as  for  the  very  rich  can  be  pushed  high; 
tenements  for  those  who  must  be  near  their  work  (or  think  they 
must  be)  and  near  their  comrades,  and  great  mansions  or  apart- 
ments for  those  whom  fashion  attracts  to  "choice"  sites.  But 
eventually,  even  with  steel  frame  construction  and  with  elevators 
and  telephones,  a  limit  is  reached  where  it  begins  to  be  less 
profitable  to  add  more  and  more  stories.  The  tendency  to 
diminishing  returns  under  the  increasing  application  of  more  and 
more  labor  and  capital  to  the  utilization  of  the  same  site,  finally 
asserts  itself. 

This  tendency  does  not  act  so  steeply  on  urban  land  as  on  rural 
land.  On  a  plot  used  for  agriculture,  diminishing  returns  are 
encountered  at  a  comparatively  early  stage.  It  is  true  that  for 
certain  purposes  —  as  for  market  gardening  or  vineyards  —  very 
intensive  use  can  be  made  of  a  few  agricultural  sites;  precisely  as 


^ 


43-§3]  URBAN  SITE  RENT  89 

highly  intensive  use  is  made  of  a  few  urban  sites.  But  in  almost 
all  cases_diminishing  returns  are  reached  comparatively  early^on 
agnculturaTTand,  and  the  obstacles  which  cause  a  lessening  of  prod- 
uct act  steeply.  On  urban  land,  on  the  other  hand,  the  obstacles 
appear  more  gradually,  and  hence  there  is  a  larger  choice  between 
the  more  and  the  less  intensive  use  of  the  sites.  One  will  find 
side  by  side,  on  the  same  city  street,  very  high  buildings  and  com- 
paratively low  ones;  indicating  that  as  regards  the  additional  stories 
on  the  high  buildings,  there  is  neither  any  great  gain  (over  and 
above  return  on  the  cost  of  construction  and  management)  nor  any 
sharp  tendency  to  a  lessening  of  return,  as  the  building  is  pushed 
higher.  It  would  seem  that  very  large  amounts  of  capital  can  be 
invested  on  some  urban  sites,  especially  on  business  premises, 
with  a  prolonged  stage  at  which  returns  are  nearly  constant. 

§  3.  On  urban  land,  as  on  agricultural  land,  there  is  no  separate 
product  of  the  land.  Nothing  is  automatically  yielded  by  the  site; 
nothing  is  earmarked  as  "rent."  What  happens  is  that  labor  and 
capital  applied  on  some  sites  yield  unusually  large  returns.  The 
sites  being  limited,  the  owners  are  able  to  keep  for  themselves  the 
excess  of  return  over  and  above  what  is  usually  got. 

The  yield  on  the  advantageous  sites  depends  in  no  small  degree 
on  the  skill  with  which  they  are  used.  Their  possibilities  are  not 
seen  by  all  persons.  The  bidding  for  them  comes  most  actively 
from  those  who  have  the  shrewdness  to  see  what  can  be  done  on 
them  and  the  courage  to  put  their  calculations  to  the  test  of  actual 
trial.  Mistakes  are  sometimes  made  and  losses  incurred  by  those 
who  lease  or  buy  city  land  on  high  terms;  while  at  other  times 
success  and  unusual  profit  follow  from  its  ingenious  utilization. 

For  example,  the  office  building  which  is  so  striking  a  feature  of 
American  cities  is  the  result  of  a  process  of  gradual  evolution. 
Successive  sets  of  persons  have  devised  more  and  more  elaborate 
utilization  of  central  sites  —  new  methods  of  construction,  higher 
buildings,  more  convenient  service.  Each  improvement  entailed 
a^rtain  risk;  each,  if  fortunate,  promptly  had  a  host  of  imitators. 
A  successful  venture  inured  to  the  advantage  first  of  the  owner  of 
the  particular  site,  and  later  to  the  owners  of  similar  sites.     Very 


90  THE  DISTRIBUTION  OF  WEALTH  [43-§3 

common!}^,  in  American  cities,  the  innovator  who  has  in  mind  a 
new  use  of  the  land  (say  thru  a  more  elaborate  building)  will  buy  it 
outright  from  the  previous  owner  at  a  price  based  on  the  traditional 
ways  of  using  it.  Then,  if  he  succeeds  in  his  venture,  he  finds  the 
return  on  his  total  investment  handsome,  and  his  site  worth  in  the 
market  more  than  it  was  before.  Sometimes  he  leases  the  land  for 
a  long  term  and  then  enjoys  the  gain  during  the  period  of  his  lease. 
Sometimes  the  owner  himself  is  shrewd  enough  and  energetic 
enough  to  use  his  site  in  such  a  way  as  to  get  the  maximum  yield. 
In  whatever  way  the  more  effective  and  profitable  utilization  comes 
about,  it  soon  has  plenty  of  imitators  and  the  new  method  becomes 
the  common  one  for  sites  of  the  same  sort;  to  be  succeeded  in  due 
time,  especially  if  the  city  continues  to  grow,  by  other  still  more 
ingenious  methods.  But  success  does  not  invariably  follow.  Mis- 
takes and  miscalculations  occur,  as  in  every  kind  of  investment. 
Often  enough  it  happens  that  a  projector  pays  high  for  a  site  and 
erects  an  elaborate  building,  perhaps  one  adapted  to  special  uses, 
in  the  expectation  of  meeting  a  brisk  demand  for  the  quarters  pro- 
vided in  it  but  finds  that  he  has  overestimated  the  growth  of  busi- 
ness in  the  city  or  the  demand  for  the  particular  accommodation 
which  he  offers. 

In  every  large  city  there  are  so-called  "real  estate  men"  who 
make  it  a  business  to  manage  investments  in  urban  realty,  partly 
for  themselves,  partly  for  others.  Among  them  a  process  of 
selection  causes  the  less  shrewd  to  drop  out,  the  more  shrewd  to 
come  to  the  fore.  Usually  there  are  some  among  them  who  are 
gifted  with  a  sort  of  instinct  for  discerning  the  possibilities  and 
adaptations  of  the  various  grades  of  city  land,  and  they  commonly 
make  large  sums,  sometimes  fortunes,  either  from  the  purchase  and 
sale  of  sites  or  as  managing  agents  for  the  owners.  They  set  the 
pace  so  to  speak,  and  are  followed  by  the  rank  and  file.  There  are 
always  others,  equally  venturesome  but  less  shrewd  or  less  fortu- 
nate, whose  experiments  do  not  succeed  and  who  lose  money  for 
themselves  and  their  backers.  The  spur  of  individual  profit^and 
the  stimulus  of  competition  are  no  less  necessary  here  than  in 
other  parts  of  the  industrial  world  for  the  most  effective  employ- 


43-§4]  URBAN  SITE  RENT  91 

ment  of  the  factors  of  production.  And  here  also  the  difficult  prob- 
lem is  that  of  so  adjusting  rewards  that  enough  shall  be  earned  by 
projectors  and  managers,  and  not  more  than  enough,  to  induce  the 
full  exercise  of  their  industrial  talents. 

§  4.  The  investment  of  capital  on  urban  sites  is  usually  more 
irrevocable  than  on  rural  sites.  It  is  true  that  there  are  agricul- 
tural improvements,  such  as  operations  for  irrigation  or  permanent 
drainage,  which  last  indefinitely  and  which,  when  once  made,  are 
irrevocable.  But  most  work  done  on  farms  exhausts  its  effects  in 
a  short  time  —  usually  in  a  few  years  —  and  the  choice  recurrently 
presents  itself  whether  any  particular  application  of  labor  and  capi- 
tal shall  be  repeated  or  shall  be  discontinued.  The  investment  of 
capital  on  urban  land,  on  the  contrary,  is  usually  such  that  the 
improvements  last  a  very  long  time,  and  hence  that  a  change  is 
made  with  difficulty. 

Thus,  in  many  seaports,  tide  flats  or  shallow  stretches  ha'>  e  been 
filled,  and  deep-water  sites  secured.  For  such  an  investment  there 
is  no  wear  and  tear,  and  no  possibility  of  shifting  the  capital  in  the 
manner  in  which  it  may  be  shifted  when  invested  in  machinery  — 
by  letting  it  wear  out  and  replacing  with  something  else.  The 
changed  land  surface  is  there  once  for  all.  So  it  is  whenever  land 
has  been  leveled  or  filled.  The  case  is  similar,  tho  not  so  extreme, 
with  buildings.  It  is  true  that  buildings  do  not  last  forever;  but 
they  may  last  for  generations,  even  for  centuries.  Commonly  they 
have  to  be  kept  in  repair,  in  order  that  they  may  be  used  at  all.  So 
long  as  they  yield  anything  over  and  above  the  expense  of  repairs, 
it  is  worth  while  to  maintain  them,  even  tho  the  return  be  but  slight 
on  what  has  been  invested.  It  will  be  profitable  to  tear  down  an  old 
or  ill-adapted  building  and  replace  it  with  a  new  building,  only 
when  the  new  one  promises  to  yield  not  merely  enough  to  pay  a 
satisfactory  return  on  its  own  cost,  but  in  addition  enough  to  com- 
pensate for  the  loss  of  the  net  revenue  which  had  still  come  in  from 
the  old  one.  Consequently  the  antiquated  structure,  even  tho 
it  does  not  utilize  the  site  in  the  best  way  or  to  the  full  extent, 
remains  undisturbed  for  a  long  time,  yielding  such  a  return  as  its 
conveniences  may  make  possible.     Where  a  city  is  growing  rapidly. 


92  THE  DISTRIBUTION  OF  WEALTH  l43-§4 

the  demand  for  new  structures  will  cause  the  stage  to  be  reached  at  a 
comparatively  early  date  when  it  will  pay  to  raze  to  the  ground  an 
obsoleteHbuilding  and  substitute  something  new  and  up-to-date. 
Where  a  city  grows  slowly,  still  more  where  its  population  is  station- 
ary, such  a  building,  especially  if  thoroly  put  together  and  in 
little  need  of  repairs,  may  remain  in  use  indefinitely  long. 

In  other  words,  when  once  an  urban  site  has  been  adapted  to  use 
by  an  investment  of  capital  —  and  the  common  and  typical  mode 
of  investment  is  that  of  erecting  a  building  on  it  —  the  return  on 
it  is  irrespective  of  the  extent  of  the  investment.  The  parcel  of 
"improved"  realty  —  land  and  building  as  one  complex  —  earns 
an  amount  determined  solely  by  its  serviceability  for  business  or 
dwelling  uses.  It  is  only  in  the  very  long  run  that  the  difference 
becomes  apparent  between  rent  and  interest  —  between  that  return 
which  goes  to  the  owner  of  the  site  as  such  and  that  which  goes  to 
the  owner  of  the  capital  put  on  it.  As  time  goes  on,  buildings  do 
wear  out,  old  ones  are  torn  down,  and  new  ones  are  substituted  in 
their  place  in  order  to  put  the  land  to  its  most  profitable  use. 
Landowners  as  such  then  secure  the  full  differential  gain  which 
their  site  is  capable  of  affording.  But  the  slowness  with  which 
capital  invested  on  land  can  be  shifted  may  prevent  for  a  long 
time  the  attainment  of  this  maximum. 

None  the  less,  it  is  usually  possible  to  ascertain  with  a  fair  degree 
of  accuracy  what  is  the  gain  or  rent  accruing  from  an  urban  site 
as  such.  While  the  ways  of  using  it  change  from  time  to  time, 
there  is  at  any  given  stage  an  established  or  normal  utilization, 
just  as  there  is  at  any  given  time  an  established  or  normal  method  of 
manufacturing  cotton  goods  or  boots  and  shoes.  It  is  practicable 
to  measure  what  are  the  income-yielding  possibilities  of  the  site  as 
such  under  these  normal  conditions.  Hence  the  selling  value  of 
the  land,  which  is  based  on  its  income-yielding  possibilities,  can 
also  be  measured  with  sufficient  exactness.  It  is  so  measured,  in 
the  higgling  of  the  market,  by  the  current  sales  of  land.  It  is 
measured  by  the  assessment  of  land  for  the  purpose  of  taxation. 
The  rent  which  the  landowner  gets,  tho  it  is  not  earmarked  as  a 
separate  return  and  tho  it  is  much  affected  by  the  use  to  which  the 


43-§4]  URBAN  SITE  RENT  93 

site  happens  to  be  put,  is  none  the  less  distinguishable  from  the 
interest  which  goes  to  him,  or  to  some  lessee,  upon  an  investment 
of  capital  in  the  land. 

It  may  seem  that  the  difference  between  rent  and  interest  is 
clear  in  the  case  of  land  leased  for  a  ground  rental.  In  Great  Bri- 
tain urban  sites  are  commonly  leased  for  a  long  term  (usually  ninety-  . 
nine  years)  and  built  on  by  the  lessee.  Leases  on  ground  rent  are 
not  unknown  in  American  cities  and  are  becoming  more  frequent; 
tho  the  common  custom  here  is  still  for  the  landowner  to  put  up  the 
building  himself.  When  ground  rent  is  paid  by  a  lessee  to  the 
landowner,  the  amount  received  by  the  latter  is  almost  always 
economic  rent  pure  and  simple.  In  Great  Britain,  where  the 
owner  of  the  site  customarily  does  nothing  whatever  to  improve 
it,  his  income  seems  to  be  clearly  of  this  nature. 

But  it  by  no  means  necessarily  follows  that  the  whole  economic 
rent  of  the  site  goes  to  him;  and  it  is  conceivable  that  he  may 
receive  under  his  lease  more  than  that  rent.  The  long-term  lessee 
may  pocket,  for  many  years,  part  of  the  strict  rent  of  the  site.^  The 
increase  of  population,  or  its  greater  concentration  in  a  particular 
city,  may  cause  the  site  to  become  more  advantageous  than  it  was 
expected  to  be  when  the  lease  was  made.  The  buildings  which  the 
lessee  erects  on  it  may  bring  a  return  much  more  than  sufficient  to 
pay  interest  and  depreciation;  there  is  a  surplus,  which  accrues  to 
him  thru  his  lucky  bargain.  It  is  possible,  of  course,  that  the 
reverse  may  happen.  The  site  may  become  not  more  advantageous 
than  was  expected  but  less  so;  and  the  landlord  will  then  receive 
under  his  bargain  more  than  his  site  proves  to  be  worth.  During 
the  last  hundred  years,  when  population  in  all  the  civilized  countries 
has  not  only  grown  but  has  crowded  more  and  more  into  the  cities, 
much  the  more  common  experience  has  been  that  ninety-nine-year 
lessees  have  pocketed  part  of  the  site  rent.    When  long  leases  of 

1  In  the  city  of  New  York  leases  of  sites  are  often  made  for  twenty  years  at  a 
stipulated  rental,  with  privilege  of  renewal  for  a  second  and  perhaps  third  term 
of  twenty  years,  the  rentals  for  the  additional  terms  to  be  fixed  by  arbitration,  or 
on  the  basis  of  a  fixed  percentage  (four  per  cent  say)  of  the  appraised  selling  value 
of  the  land.  Such  an  arrangement  makes  it  more  certain  that  the  landowner  will 
secure  the  full  economic  rent. 


94  THE  DISTRIBUTION  OF  WEALTH  [43-§5 

this  sort  reach  the  end  of  their  term,  there  is  sometimes  a  wonderful 
accretion  for  the  heirs  or  successors  of  the  lessor  of  a  century  before. 
An  ancestor  of  the  Duke  of  Bedford  in  the  eighteenth  century 
leased  large  tracts  on  what  was  then  the  edge  of  London,  for  ground 
rent.  Ninety-nine  years  later,  when  the  land  was  in  the  heart  of 
the  great  metropolis,  his  descendants  reaped  a  huge  harvest  of 
urban  site  rent.  Such  windfalls  bring  into  sharp  relief  the  mean- 
ing of  "unearned  increment,"  and  they  suggest  also  questions  as  to 
the  possible  limitation  of  private  ownership  in  urban  land  to  which 
we  shall  presently  give  attention. 

§  5.  Reference  has  been  made  to  "real  estate  men"  and  to  the 
higgling  and  bargaining  by  which  the  prices  of  city  sites  are  fixed. 
Speculation  in  urban  land  is  a  familiar  phenomenon  in  modern  com- 
munities. Especially  where  the  law  of  real  property  makes  easy 
the  transfer  of  title,  sites  are  bought  "for  a  rise,"  and  are  passed 
from  hand  to  hand  at  fluctuating  prices  according  to  the  calcula- 
tions of  sellers  and  buyers.  In  cities  that  grow  rapidly,  or  are 
expected  to  grow  rapidly,  the  speculation  is  sometimes  furious. 
The  bidders  for  promising  sites  overreach  themselves,  and  in  the 
end  some  among  them  incur  heavy  losses;  while  others,  more 
shrewd  or  fortunate,  pocket  gains  from  the  accruing  rise  in  the 
value  of  the  land  or  from  the  mistakes  of  their  fellow  speculators. 

In  all  this  there  seems  to  be  purely  unproductive  labor,  as  that 
phrase  was  defined  before.^  No  small  amount  of  energy  and  skill 
is  given  to  figurings  and  calculations,  bargainings  and  perhaps 
intrigues,  whose  outcome  is  simply  to  cause  one  person  rather  than 
another  to  get  the  gain  from  growing  site  value.  From  the  social 
point  of  view,  this  seems  to  be  waste.  True,  it  is  not  quite  like 
ordinary  gambling  where  one  person  gains  precisely  what  the  other 
loses.  Unless  real  estate  speculation  be  overdone,  one  person  gains 
only  something  which  another  fails  to  gain.  Nevertheless,  nothing 
appears  to  be  contributed  to  the  community's  income. 

This  in  the  main  is  true;  yet  it  is  subject  to  some  qualification. 
Speculation  in  city  land  does  contribute  something  to  the  commu- 
nity's welfare,  in  so  far  as  it  promotes  the  most  effective  use  of  the" 

'^  1  See  Chapter  11.  ] 


43-§6]  URBAN  SITE  RENT  95 

land.  It  stimulates  those  who  are  engaged  in  it  to  ferret  out  all  the 
possibilities.  It  tends  to  bririg~tHe  land  into  hands  which  will 
utilize  it  to  the  utmost.  The  successful  speculator  is  commonly  a 
projector  who  hits  on  new  and  more  effective  uses  of  the  sites,  or 
a  person  who  fraternizes  with  such  projectors  and  weighs  their 
schemes  with  judgment. 

Here,  as  in  almost  all  of  the  working  of  the  system  of  private 
property,  the  question  is  one  of  the  balance  of  advantage  and  dis- 
advantage. Much  the  same  question  presented  itself  in  the  discus- 
sion of  speculation  in  commodities,  such  as  grain  and  cotton.^ 
Speculation,  whether  in  goods  or  land,  has  its  advantages  for  the 
community;  but  more  persons  engage  in  it,  and  more  labor  is  given 
to  it,  than  is  necessary  to  secure  that  advantage.  There  is  no  small 
diversion  of  time  and  energy  to  what  must  be  termed  unproductive 
operations.  How  far  these  can  be  restricted  without  sapping  the 
inducements  to  improvement  is  part  of  the  fundamental  problem 
of  modern  society  —  that  of  promoting:  both  progress  and_equality. 

There  is  another  sense  in  which  speculation  in  general,  whether 
of  the  serviceable  or  the  unproductive  kind,  may  be  said  to  be  one  of 
the  factors  on  which  rests  the  demand  for  urban  business  sites. 
What  proximately  determines  the  demand  for  such  sites  is  the 
facilities  they  afford  for  money-making.  While  pecuniary  gain 
arises  commonly  from  the  use  of  sites  in  ways  that  really  add  to  the 
well-being  of  the  community  —  as  when  premises  are  used  for  trade 
or  manufacturing  —  it  may  come  also  when  a  site  is  used  for 
gambling  operations.  A  great  lottery,  if  permitted  to  exist  by  the 
law  (as  it  still  is  in  some  European  countries,  to  their  shame), 
would  pay  handsomely  for  premises  in  the  heart  of  a  great  city. 
The  brokers  thru  whom  speculative  gambling  is  carried  on  are 
among  the  most  insistent  bidders  for  quarters  in  the  financial  dis- 
tricts of  large  cities;  for  they  must  be  near  the  center  of  things  to 
reach  their  customers  and  execute  their  customers'  orders. 

§  6.  Urban  land  values  and  urban  rent  are  sometimes  created. 
As  has  just  been  said,  the  precise  point  at  which  a  city  shall  arise 
is  not  settled  solely  by  natural  causes;  still  less  do  such  causes  settle 

i  See  above,  Chapter  11. 


96  THE  DISTRIBUTION  OF  WEALTH  [43-§6 

the  precise  spot  within  a  city  which  shall  have  large  site  value. 
Projectors  sometimes  try  to  direct  the  forces  that  bring  urban  rent 
into  existence.  A  large  industrial  enterprise  or  set  of  enterprises 
may  be  established  in  a  small  village,  or  on  a  spot  where  there  had 
not  been  even  a  village,  in  the  expectation  that  about  it  a  city  will 
grow  up,  with  its  accruing  land  values;  the  owners  (or  managers) 
buying  up  the  land  in  advance  and  expecting  to  profit  by  its  sale  or 
lease.  Thus  the  Pullman  Company  established  the  town  of  Pull- 
man, near  Chicago.  The  Steel  Corporation  deliberately  created 
Gary.  A  great  railway  company,  by  placing  its  workshops  at 
one  spot  or  another,  may  influence  markedly  the  growth  of  a  city. 
And  within  a  city  the  same  sort  of  intentional  direction  of  the 
urban  currents  may  be  attempted.  Two  or  three  great  firms  or 
banking  houses  may  transfer  their  operations  to  a  new  street  and 
carry  business  after  them.  Similarly  with  sites  for  dwellings: 
persons  of  wealth  and  social  repute  may  move  to  a  new  district  and 
give  it  the  prestige  of  fashion.  By  purchasing  in  advance  the  sites 
they  propose  to  bring  into  favor,  they  may  secure  for  themselves 
the  newly  arising  land  values. 

In  most  cases,  it  is  true,  land  values  are  guided  or  diverted 
rather  than  created.  If  population  is  the  same,  and  is  distributed 
in  the  same  way,  site  rent  is  sure  to  arise  in  any  event.  Then  it  is 
possible  only  to  cause  it  to  appear  in  one  place  rather  than  an- 
other; not  to  add  to  its  amount.  Yet  there  are  cases  where  its 
amount  may  be  aft'ected,  as  in  the  skillful  development  of  a 
"residential"  suburb  or  section,  or  in  that  of  a  well-planned 
manufacturing  center. 

All  such  operations,  however,  whether  they  create  or  merely 
divert  urban  values,  are  attended  with  risks  even  greater  than  those 
of  ordinary  investment  on  the  land.  Where,  for  example,  a  new 
city  is  sought  to  be  created,  streets  must  be  made  and  water  mains, 
sewers  and  other  conveniences  put  in.  The  whole  depends  for  its 
profit  on  the  fulfillment  of  the  expected  growth.  A  set  of  project- 
ors tried  to  create  a  manufacturing  town  named  Depew  near  the 
city  of  Buffalo,  and  spent  much  money  in  preparatory  operations. 
But  they  found  it  difficult  to  get  either  industries  or  people  to 


43-§6]  URBAN  SITE  RENT  97 

betake  themselves  to  Depew,  and  the  final  outcome  was  failure  and 
loss.  So  it  may  be  with  attempts  to  turn  urban  currents  toward 
new  streets  or  outlying  districts.  The  favor  of_the  crowd  — 
whether  it  be  a  set  of  business  men  or  of  the  idle  rich  —  is  prover- 
bially fickle,  llercj  a^ain,  shrc\v(hiess  and  personality  tell.  Some 
individuals  will  undertake  such  ventures  and  overcome  obstacles 
with  success,  while  others  will  fail.  The  higher  site  values  which 
may  be  attained  in  places  so  developed  will  not  represent  economic 
rent  pure  and  simple;  they  will  be  to  a  greater  or  less  degree  com- 
pensation for  risk  and  earnings  of  managing  activity. 

There  are  cases,  on  the  other  hand,  in  which  the  risk  is  small, 
even  negligible.  When  a  government  establishes  a  great  work- 
shop or  a  large  educational  institution,  it  is  well-nigh  certain  that 
population  will  be  directed  to  the  favored  spot  and  that  some 
influence  on  site  values  will  appear.  When  an  important  railway 
fixes  on  a  given  town  as  its  "division  point,"  that  is,  a  center  for 
administration  and  operation,  or  places  its  manufacturing  and 
repair  shops  there,  the  result  is  no  less  certain.  It  may  chance 
that  the  managers  and  directors  of  the  railway,  who  know  in 
advance  what  is  to  happen,  can  then  mak£.money'by  clandestine 
purchase  of  sites  —  a  semi-corrupt  abuse  of  positions  of  trust 
which  unfortunately  has  too  often  appeared  in  connection 
with  railway  management  in  the  United  States.  In  such  cases, 
the  gain  should  be  reaped,  if  by  any  individuals,  by  the  stock- 
holders of  the  railway  as  a  whole,  not  by  a  clique  of  managers. 
Better  still,  it  should  be  reaped  by  no  individuals,  but  should  go 
to  the  entire  community. 


CHAPTER  44 
Rent,  concluded 

Section  1.  The  rent  of  mines,  how  influenced  by  risk,  98  —  Sec.  2.  Dimin- 
ishing retm-ns  in  mines,  100  —  Sec.  3.  Are  mining  royalties  rent?  102  — 
Sec.  4.  The  seUing  price  of  a  site  is  a  capitaUzation  of  its  rent,  103  —  Sec. 
5.  The  problem  of  appropriating  rent  for  the  pubHc  is  presented  most 
sharply  by  urban  sites.  The  possibility  of  leases  on  long  term  by  the 
state;  the  historical  development  of  unqualified  private  ownership 
and  of  vested  rights,  104  —  Sec.  6.  The  future  increase  of  rent  a  proper 
object  of  taxation,  but  presents  many  difficulties.  Modes  of  levying 
such  taxes,  108. 

§  1.  Mines  present  a  ease  in  some  respects  similar  to  that  of 
urban  and  agricultural  sites,  in  some  respects  different.  There 
are  obvious  differences  between  individual  mines.  Some  are 
richer  than  others  or  more  advantageously  situated,  and  these 
yield  a  differential  return  to  their  owners.  If  we  assume  free  com- 
petition and  mobile  investment,  we  may  reason  that,  as  the  demand 
for  a  given  mineral  (say  coal)  increases,  more  and  more  mines  will 
be  put  in  operation  —  the  most  productive  first,  then  those  less  SQ,;„. 
that  the  coal  will  normally  sell  for  enough  to  repay  all  expenses  of 
production  on  the  margin,  that  is,  at  the  poorest  mine  in  use;  and 
that  all  better  mines  will  yield  a  surplus  income  which  is  strictly 
rent. 

But  with  mines  the  conditions  of  mobile  investment  hold  good 
only  to  a  limited  degree.  Mobility  of  investment  presupposes  not 
only  ease  of  transfer  for  capital,  but  also  a  generally  diffused 
knowledge  of  the  prospects  of  profit.  Neither  of  these  conditions 
obtains  in  mining,  which  calls  for  an  irrevocable  and  usually  very 
large  investment,  and  involves  a  high  degree  of  risk  and  uncer- 
tainty. 

There  is  some  risk  in  all  use  of  land.  The  risk  probably  is 
least  in  the  long  run  (that  is,  over  a  series  of  years  long  enough  to 
equalize  the  accidents  of  the  season)  in  the  case  of  agricultural 

98 


44^§1]  RENT   (Concluded)  99 

land;  for  the  possibilities  of  such  land  are  readily  discerned  by  any 
capable  farmer.  It  is  greater  in  the  case  of  urban  sites,  where 
there  is  the  chance  of  ill-adapted  buildings,  of  shifting  population, 
of  the  caprices  of  business  movements.  It  is  greatest  in  the  case 
of  mines ;  tho  varying  again  for  different  sorts  of  mines.  Even  tho 
prospecting  is  sometimes  facilitated  or  encouraged  by  a  preliminary 
geological  and  physiographic  survey  (such  as,  for  example,  that 
which  ascertains  the  carboniferous  area  of  a  country)  and  even  tho 
it  may  thus  be  known  that  abundant  mineral  underlies  a  given  area 
—  none  the  less,  expensive  trial  is  needed  to  ascertain  how  much 
there  is,  of  what  quality,  of  what  ease  of  procurement.  When 
once  a  coal  mine  has  been  opened  and  put  into  operation,  it  is 
usually  possible  to  judge  how  long  the  supplies  will  last  and  what 
will  be  the  expense  of  getting  them  to  market;  but  even  this  is 
in  some  part  a  matter  of  guesswork.  The  case  is  similar  with  iron 
ore.  Here,  also,  drilling  and  prospecting  will  often  show  how  large, 
how  good,  how^  accessible,  is  the  ore  body;  but  this  preliminary 
knowledge  is  got  only  by  scoiu-ing  a  wdde  territory.  A  multitude 
of  failures  in  "prospecting"  is  relieved  by  occasional  success. 
Where  minerals  occur  in  pockets,  the  chances  both  of  failure  and 
success  are  greatest,  and  the  miner's  operations  are  akin  to  gam- 
bling. Such  was  the  case  with  the  so-called  bonanza  mines  of  the 
precious  metals  in  Nevada.  Some  discoveries  of  these  extraordi- 
narily rich  pockets  of  gold  and  silver  brought  fortunes  to  their 
owners.  On  the  other  hand,  there  were  unnumbered  failures, 
tempted  by  deceptive  surface  indications.  Copper  mining  is 
notoriously  uncertain  and  speculative.  In  all  such  cases,  even 
when  the  first  excavations  are  promising,  there  is  a  stage  of  doubt, 
when  capital  must  be  invested  in  the  form  of  shafts,  machinery, 
concentrating  and  smelting  works.  Venturesomeness,  judgment, 
persistence,  and  efficient  management  are  essential  to  ultimate 
success. 

Where  there  are  many  losses,  there  must  be  corresponding  gains. 
The  traveler  thru  such  states  as  Colorado,  Nevada,  Montana, 
Idaho,  Arizona,  California,  sees  the  sides  of  the  hills  and  mountains 
scarred  by  innumerable  openings,  each  with  its  tell-tale  pile  of  rock. 


100  THE   DISTRIBUTION  OF  WEALTH  [44- §  2 

The  immense  majority  of  these  ventm-es  were  failures.  Were  it  not 
for  the  chance  of  some  great  prizes,  all  this  necessary  work  of  explo- 
ration would  not  have  been  undertaken.  Under  such  conditions  a 
high  return  on  the  lucky  ventures  does  not  constitute  a  true  sur- 
plus. Nor  is  it  easy  to  say  whether  on  the  whole  the  gains  in 
successful  mining  ventures  suffice  to  offset  the  losses  in  the  unsuc- 
cessful. Prizes  often  have  an  undue  effect  on  the  imagination. 
The  unfailing  attractiveness  of  a  lottery  (in  which  it  is  obvious  that 
the  speculators  as  a  body  must  lose)  proves  that  where  there  is  a 
chance  of  great  gain  from  a  lucky  stake,  men  will  often  pay  for  the 
chance  more  than  its  actuarial  value.  As  has  already  been  noted, 
there  is  ground  for  supposing  that  in  mining  for  the  precious  metals 
in  former  times  the  total  outlays  were  not  recompensed  by  the 
total  net  earnings.^  At  least  a  possibility  of  the  same  sort  exists 
as  regards  mining  operations  in  general. 

It  is  probable  that  in  many  mining  ventures  the  risk  is  less  now 
than  it  was  in  former  days;  while  on  the  other  hand  the  need  of 
large  initial  investment  is  greater.  With  the  advance  of  geological 
and  mineralogical  knowledge  it  is  much  more  possible  to  infer  from 
the  surface  outcrop  or  from  experimental  borings  the  quality  and 
quantity  of  what  is  underneath.  The  improvements  in  treating 
ores  have  made  available  low-grade  ores  of  gold,  silver,  copper, 
lead,  such  as  occur,  not  in  pockets,  but  in  continuous  veins,  or  great 
beds.  This  is  the  case,  for  example,  in  the  gold  mines  of  South 
Africa,  from  which  so  great  a  supply  of  gold  has  been  secured 
during  recent  years.  Here  mining  operations,  when  once  the  body 
of  ore  has  been  found,  are  in  no  great  degree  speculative;  and  the 
yield  on  the  better  sources  of  supply  has  more  the  nature  of  a  true 
surplus  or  rent.  The  same  is  the  case  with  much  mining  of  iron 
ore  and  coal  in  modern  times,  where  the  mineral  body  can  be 
surveyed  and  appraised  in  advance  with  some  measure  of  certainty. 
None  the  less  —  especially  in  view  of  the  heavy  investment  in 
diggings  and  machinery  required  by  modern  mining  methods  — 
risk  is  greater  than  in  most  industrial  operations  above  ground. 

§  2.  There  is,  in  a  sense,  a  tendency  to  diminishing  returns  in 

1  See  Chapter  19,  §  1. 


44-§2]  RENT  (Concluded)  101 

mines.    Yet  in  this  regard  also  the  general  reasoning  which  under- 
lies the  principle  of  rent  must  be  qualified  in  its  application  to 
mining. 
In  any  one  mine,  there  is  often  —  probably  in  a  majority  of  cases 

—  a  tendency  to  lessening  yield  with  increasing  depth.  Pumping 
to  keep  it  free  of  water  becomes  more  costly,  and  minerals  must  be 
hoisted  farther  to  bring  them  to  the  surface.  So  it  is  with  the  tin 
mines  of  Cornwall,  which  after  centuries  of  working  have  now  been 
extended  beyond  the  shore  line  far  under  the  bottom  of  the  sea.  It 
is  the  case,  also,  with  the  anthracite  mines  of  Pennsylvania.  And 
in  the  end,  too,  every  mine  reaches  its  absolute  limit.  A  mine  is  not, 
like  agricultural  land,  or  an  urban  site,  a  permanent  instrument 
enabling  the  investment  of  capital  to  be  continued  without  limi- 
tation of  time.     Its  store  is  fixed  —  even  tho  sometimes  very  large 

—  and  when  that  store  is  exhausted,  there  is  not  diminution  of 
return  but  complete  cessation. 

Against  these  tendencies  to  diminishing  return  and  to  ultimate 
exhaustion  must  be  set  the  possibility,  even  the  probability,  of  the 
discovery  of  new  sources  of  supply.  The  total  land  area  available 
for  agriculture  (even  tho  there  are  sometimes  unexpected  open- 
ings) is  known  with  sufficient  accuracy.  But  what  is  contained  in 
the  bowels  of  the  earth  must  always  be  more  or  less  uncertain. 
The  nineteenth  century  was  marked  by  the  finding  of  wonderful 
mineral  resources.  In  Great  Britain  there  was  the  discovery  of 
the  great  Scotch  iron  ore  deposits  at  the  opening  of  the  century, 
and  of  the  Cleveland  deposits  (on  the  northeast  coast)  in  the 
middle.  In  the  United  States,  after  the  coal  deposits  of  the 
Pittsburgh  region,  came  those  of  Ohio,  Indiana,  and  Illinois.  Not 
less  important  were  the  great  copper  deposits  of  IMichigan,  Mon- 
tana, and  Arizona,  discovered  successively  after  the  Civil  War,  and 
the  iron  ore  deposits  of  the  Lake  Superior  region,  of  even  more 
recent  exploitation.  The  gold  mines  of  South  Africa  have  been 
found  within  the  same  recent  period.  It  is  known  that  there  are 
other  untapped  resources,  such  as  the  great  iron  and  coal  deposits 
of  China,  the  coal  regions  of  Alaska;  and  there  may  be  still  others 
not  yet  dreamed  of.    Notwithstanding  the  limitations  of  each 


U^' 


102  THE  DISTRIBUTION  OF  WEALTH  [44-§3 

single  deposit  in  the  earth's  crust,  mankind  may  look  forward,  for 
long  ages  to  come,  to  an  increase  rather  than  to  a  diminution  of  its 
available  mineral  resources. 

§  3.  The  owner  of  a  mine,  when  he  leases  it  to  another  for  work- 
ing, usually  gets  a  royalty  —  a  fixed  payment  of  so  much  per  ton. 
» Royalties  naturally  vary  with  the  quality  of  the  minerals  and  the 
ease  of  their  extraction.  They  are  a  rough-and-ready  way  of 
carving  out  the  economic  rent.  They  are  not  necessarily  in  the 
nature  of  rent;  for  where  a  mine  has  been  found  by  "prospecting," 
with  all  the  risk  of  possible  failure,  the  payment  may  stand  for  no 
real  surplus.  But  where  royalties  are  paid  in  well-explored  coun- 
tries, on  minerals  whose  quality  and  value  are  reasonably  well 
known,  they  are  simply  rent.  Such  seems  to  be  the  case  with  the 
royalties  on  English  coal  mines. 

It  is  argued  by  some  able  economists  ^  that  a  royalty  is  in  any 
case  different  from  rent;  or  rather,  that  there  is  on  every  mine 
some  sort  of  payment  to  the  owner,  or  revenue  for  him,  and  that 
even  the  poorest  mine  will  yield  something  in  the  natm-e  of  a 
royalty.  The  better  mines  yield  in  addition  a  true  rent,  disguised 
as  a  further  or  ampler  royalty  payment.  The  ground  for  this 
contention  is  that  a  mine  contains  a  fixed  store,  and  that  the 
owner  will  not  consent  to  its  partial  exhaustion  unless  he  receives 
some  recompense.  But  I  am  skeptical  of  the  validity  of  this  rea- 
soning. The  fact  that  a  store  is  physically  limited  does  not  enable 
its  owner  to  secure  a  price.  Sand  and  clay  are  thus  limited;  but 
the  available  quantity  is  so  abundant  that  a  clay  pit  or  sand  deposit 
is  worth  nothing  unless  it  has  an  advantage  of  situation.  It  may 
(be  doubted  whether  any  payment  at  all,  royalty  or  whatever  it  be 
called,  can  be  secured  hy  the  owner  of  the  very  poorest  mine  — 
assuming  he  has  done  nothing  to  develop  it.  •  Deposits  of  this 
sort  are  at  the  margin  of  utilization,  and  at  the  margin  there  is  no 
surplus  of  any  sort.  Probably  no  mine  in  its  entirety  is  on  the 
margin;   just  as  no  farm  in  its  entirety  is  on  the  margin.     Good 

»  This  is  Professor  Marshall's  view;  Principles  of  Economics,  Book  V,  Chapter 
X,  §  6  (6th  edition).  It  was  also  Ricardo's  view;  Political  Economy,  Chapter  III. 
On  the  whole  subject,  see  Professor  L.  Einaudi,  La  Rendita  Mineraria. 


44-§4]  RENT  (Concluded)  103 

bits  are  mixed  with  bits  less  good,  and  the  actual  payment  is  ad- 
justed by  a  higgUng  process,  in  which  account  is  taken  of  the 
whole  of  the  natural  opportunities  as  well  as  of  all  the  expense  and 
risk  of  development.  Here,  as  in  every  part  of  the  economic  field, 
the  concrete  phenomena  show  only  an  approximate  correspondence 
with  the  sharply  stated  theorems  that  serve  to  indicate  their  gen- 
eral trend.  But  rent  proper  shows  the  same  sort  of  development  on 
mines  as  on  other  natural  agents. 

§  4.  The  selling  value  of  a  natural  agent  —  be  it  agricultural 
land,  an  urban  site,  a  developed  mine  —  is  a  capitalization,  at  the 
currentjaJ^-oLinteiejjL  of  the  fixed  income  which  accrues  to  its 
owner.  It  varies,  therefore,  inversely  to  the  rate  of  interest. 
Suppose  a  building  on  a  given  site  is  to  cost  $100,000,  and  promises 
a  net  income  or  commercial  rental  of  $15,000  a  year;  then  if  the 
rate  of  interest  be  5  per  cent,  the  investor  will  readily  pay  $200,000 
for  the  site.  On  his  total  outlay  of  $300,000  he  will  get  $15,000,  or 
5  per  cent.  If  the  rate  of  interest  should  fall  to  2^  per  cent,  the 
same  site  would  sell  for  $400,000.  The  differential  advantage  of 
the  site  would  remain  as  before  —  worth  $10,000  a  year;  and  the 
buyer  would  get  2|  per  cent  on  his  investment  by  purchasing  the 
site  for  $400,000.  On  the  $100,000  invested  in  the  building  he 
would  be  compelled  by  competition  to  accept  the  current  interest 
rate  of  2^  per  cent,  and  the  total  rental  would  be  $12,500,  not 
$15,000.  The  decline  in  the  rate  of  interest  would  lessen  the 
return  on  the  building  (considered  alone),  but  would  double  the 
value  of  the  land.  The  lower  the  rate  of  interest  on  freely  offered 
cajntal,  the  higher  the  sum  which  will  be  paid  for  any  piece  of 
property  which  jields  a  fixed  return. 

^~  The  same  principle  applies  to  what  are  known  as  guaranteed 
seciu*ities  —  the  shares  of  corporations,  such  as  railroad  corpora- 
tions, which  have  been  leased  on  fixed  terms.  Thus  one  railway 
may  be  leased  (virtually  bought  up)  by  another,  with  stipulation 
to  pay  an  annual  sum  equal  to  10  per  cent  on  its  shares.  If  the 
current  rate  of  interest  is  5  percent,  each  share  of  the  leased  railway 
(par  value  being  assumed  to  be  $100)  will  sell  for  $200.  If  the  rate 
of  interest  is  4  per  cent,  it  will  sell  for  $250;  if  2^  per  cent,  for  $400. 


104  THE  DISTRIBUTION  OF  WEALTH  [44-§5 

The  selling  price  of  land  is  affected,  of  course,  not  only  by  the 
process  of  capitalizing  its  present  rent,  butjby  the^expectations  of 
the  owners  and  of  the  investing  and  speculating  public  concerning 
the  future.'  In  a  growing  city,  an  advantageous  site  will  command 
a  price  more  than  in  proportion  to  its  present  rent,  because  it  is 
expected  that  the  rent  will  increase  still  further  as  the  years  go  on. 
Conversely,  a  doubt  as  to  the  future  of  the  site  will  cause  it  to  sell  at 
a  price  lower  than  its  present  rent  would  determine. 

§  5.  The  same  problems  of  public  policy  arise  for  urban  land  as 
for  agricultural  land.  There  is  here  an  unearned  iiierenLent,  due 
to  the  increase  and  thickening  of  population  and  ascribable  in 
slight  degree,  if  at  all,  to  the  labor  or  care  of  the  fortunate  posses- 
sors. There  is  a  differential  return  over  and  above  what  is  neces- 
sary, on  the  most  liberal  estimate,  to  induce  the  adaptation  of  the 
site  to  its  most  effective  uses.  Why  should  not  the  community 
appropriate  this  return?  , 

This  question  is  presented  more  sharply  in  the  case  of  urban 
land  than  in  that  of  agricultural  land.  In  the  first  place,  it  is 
usually  possible  to  ascertain  with  more  accuracy  just  what  is  the 
site  rent  and  the  site  value  of  urban  land.-  We  have  seen  that  for 
any  specific  plot  of  agricultural  land  which  has  long  been  in  use, 
there  is  great  difficulty  in  determining  how  much  of  its  productivity 
is  due  to  natural  advantages,  how  much  to  man's  action.  That 
difficulty  is  much  less  for  urban  plots.  It  is  almost  always  possible 
to  state  at  least  a  minimum  sum  which  represents  the  differential 
advantage  of  the  site  pure  and  simple.  Something  must  be 
allowed,  it  is  true,  not  only  for  pure  interest,  but  for  the  risk  and 
labor  involved  in  building  and  management.  But  after  the  most 
liberal  allowance  for  all  such  items,  a  surplus  remains.  In  other 
words,  it  is  possible  to  set  aside  some  part  of  the  gross  return  which 
is  clearly  rent  for  the  site. 

In  the  second  placey  urban  rent,  is  ugualljnconcentm  in  fewer 
]bands,.and  gives  rise  to  wider  inequalities  of  wealth  and  income. 
Urban  rent  may  or  may  not  be  in  the  aggregate  greater  in  amount 
than  agricultural  rent.  In  countries  like  Germany  and  France, 
agricultural  rent  is  probably  at  least  as  great.    In  England,  where 


44^§5]  RENT  {Concluded)  105 

much  the  larger  part  of  the  population  is  gathered  in  cities  and 
where  the  free  importation  of  foreign  produce  checks  the  growth  of 
agricultural  rent,  urban  rent  is  no  doubt  much  larger  in  the  aggre- 
gate. It  probably  is  so  in  the  United  States  also;  for  the  abun- 
dance of  farming  land  and  the  efficiency  of  the  means  of  transpor- 
tation have  limited  agricultural  rent,  while  the  increase  of  city 
population  has  vastly  enhanced  urban  rents.  .  But_in  any  case 
f^  urban  land  is  usually,  in  fewerhands.  True,  the  agricultural  land 
of  Great  Britain  is  concentrated  in  comparatively  few  hands,  and 
in  Austria  also  there  are  (or  were)  vast  estates  in  the  possession  of 
a  small  number  of  titled  proprietors.  In  France,  however,  in 
southern  and  western  Germany,  and  in  the  United  States,  the 
ownership  of  agricultural  land  is  widely  diffused ;  and  its  economic 
rent  is  dispersed  among  millions  of  proprietors.  Urban  rent,  on  the 
other  hand,  flows  into  the  hands  of  a  much  smaller  number  of  per- 
sons, and  among  these  a  few  receive  great  amounts.  '  The  Duke 
of  Westminster  and  the  Duke  of  Bedford  are  types  of  British  peers 
who  have  been  enormously  enriched  by  the  ownership  of  urban 
sites  and  the  falling-in  of  long-term  leases.  John  Jacob  Astor  in 
the  early  years  of  the  nineteenth  century  became  the  owner  of 
sites  in  New  York  whose  value  in  the  course  of  the  century  became 
almost  fabulous;  his  descendants  not  only  enjoy  this  yield,  but 
have  greatly  enlarged  the  family  holdings,  until  their  income  has 
exceeded  that  of  dukes  and  princes.  The  same  sort  of  thing  has 
happened  in  almost  every  American  city.  Certain  "old  fam- 
ilies" —  usually  founded  by  an  ancestor  of  the  successful  business- 
man type  —  have  become  rich  from  the  growth  of  the  community. 
It  is  true  that  tenacious  holding  of  the  land  by  successive  genera- 
tions of  the  same  family  is  much  less  common  in  the  United  States 
than  in  Great  Britain.  The  ease  of  transferring  the  title  to  land 
'^^  and  the  habit  of  speculation  have  caused  a  dispersion  of  urban 
rent  in  our  own  country  and  a  parceling  of  the  increment  among  a 
succession  of  purchasers.  None  the  less,  in  the  United  States,  as 
in  other  countries,  urban  rent  has  been  a  cause  of  conspicuous 
inequalities  in  wealth. 
Hence  the  proposal  to  appropriate  for  the  public  the  whole  or  a 


106  THE  DISTRIBUTION  OF  WEALTH  l44-§5 

part  of  rent  is  urged  more  insistently  for  urban  sites  than  for  agri- 
cultural land.  It  seems  to  me  impossible  to  deny  that  if  a  reserva- 
tion of  rent  for  the  community  had  been  made  from  the  start, 
with  due  care  and  discrimination,  the  community  would  have  been 
better  off.  The  effective  utilization  of  the  land  would  not  have 
been  retarded,  while  a  lessening  of  the  general  tax  burdens  and  a 
check  to  inequality  would  have  been  brought  about.  Careful  and 
discriminating  management  would  indeed  have  been  essential. 
The  quinquennial  or  decennial  carving  out  of  economic  rent  would 
have  raised  delicate  questions  as  to  how  much  allowance  should  be 
made  for  the  return  necessary  to  enlist  shrewdness  and  enterprise. 
A  mechanical  administration  of  such  a  system,  still  more  a  grasp- 
ing one  (and  public  administration  is  too  apt  to  show  one  or  both 
of  these  characteristics)  might  bring  more  harm  to  the  community 
in  checking  the  utilization  of  land  than  good  in  capturing  the  un- 
earned increment. 

The  leasing  of  land  on  long  terms  by  the  state,  which  was  sug- 
gested among  the  possibilities  for  agricultural  land,  would  have 
been  no  less  possible  for  urban  land.  So  far  as  the  promotion  of 
investment  goes,  a  lease  for  ninety-nine  years  is  as  good  as  a  title  in 
fee  simple.  No  doubt,  if  land  were  held  on  such  terms  from  the  state, 
the  holder  during  a  large  part  of  the  ninety-nine  years  might  secure 
a  handsome  slice  of  the  accruing  site  value..  But  at  least  when 
the  end  came  the  community  would  reap  its  gain.  Much  shorter 
leases  —  for  fifty  or  even  twenty-five  years  —  could  conceivably 
be  drawn,  with  provisions  for  compensation  to  the  improving 
tenant  such  as  would  allow  sufficiently  free  play  to  the  investment 
of  capital.  Land  leases  for  such  terms  are  not  uncommon  in 
the  city  of  New  York  {e.g.  on  the  Astor  properties)  and  are 
not  found  incompatible  with  the  most  intensive  utilization  of 
the  sites. 

In  the  case  of  mines,  it  is  difficult  to  see  how  any  other  method 
than  that  of  long  leases  could  secure-  the  two  desired  ends  —  the 
effective  utilization  of  the  resources  and  the  conservation  of  the 
public's  fundamental  equity.  The  uncertainties  of  mining  are  such 
that  any  recurrent  carving  out  of  economic  rent  is  quite  impracti- 


44-§5]  RENT  (Concluded)  107 

cable.  The  only  feasible  policy  would  be  that  of  allowing  private 
enterprise  to  take  its  risks  and  reap  its  rewards  over  a  stated  period. 
No  doubt  the  possessor  or  tenant  during  his  term  would  be  tempted 
to  work  the  mine  to  the  utmost  and  perhaps  exhaust  it;  a  difficulty 
possibly  to  be  met  by  requiring  the  payment  of  a  progressive  roy- 
alty as  a  large  output  was  reached.  Here,  as  elsewhere,  occasional 
great  gains  to  lucky  or  shrewd  investors  must  be  accepted  with 
equanimity;  a  policy  too  grasping  overreaches  itself. 

All  this,  however,  is  little  more  than  idle  speculation,  at  least  so 
far  as  the  past  is  concerned.  No  community  has  reserved  to  itself, 
by  lease  or  by  periodic  levy,  the  right  to  the  unearned  increment. 
Historically  it  could  not  be  otherwise.  Private  property  in  land 
was  an  indispensable  instrument  for  the  advance  of  civilization. 
Surveying  the  history  of  European  industry  and  the  growth  of 
European  cities,  weXcannot  see  how  advancing  arts,  free  enter- 
prise, accumulating  capital,  could  have  been  secured  without  the 
instrument,  comparatively  crude  as  it  may  seem,  of  unqualified 
title  to  land.  The  new  countries  of  modern  times  —  the  United 
States,  Canada,  Australia,  Argentine,  and  the  like  —  might  con- 
ceivably have  started  with  a  more  far-sighted  and  more  complex 
system  of  land  tenure.  In  fact  they  have  not  done  so.  The  force 
of  tradition  and  habit,  the  rapacious  desire  of  the  pioneers  for  the 
unrestricted  title,  ignorance  and  indifference  about  the  underlying 
economic  principles,  have  led  them  to  follow  the  ways  of  old 
countries  and  to  accept  the  established  principles  of  the  unquali- 
fied law  of  real  property. 

Hence  the  problem  of  vested  rights  in  urban  land  stands  as 
stubbornly  in  the  way  of  the  ardent  reformer  as  it  does  for  agri- 
cultural land.  The  purchase  and  transfer  of  urban  sites  have 
gone  on  from  time  immemorial  in  the  same  way.  To  the  present 
owners  the  capitalized  value  represents  an  investment  or  an  inher- 
itance. Land  at  its  existing  value  cannot  be  treated  on  different 
principles  from  those  applied  to  other  kinds  of  property.  -The 
whole  institution  of  property  may  indeed  be  overhauled ;  all  pri- 
Y_ate_ownership  and  investment,  all  inheritance,  may  be  restricted, 
conceivably  abolished;  but  unless  tlie-system  of  private  property 


108  THE  DISTRIBUTION  OF  WEALTH  [44-§6 

be  remade,  the  existing  rights  to  land,  as  they  have  been  allowed 
to  develop  thru  the  centuries,  must  be  respected. 
/  §  6.  The  question  is  different  as  regards  the  rise  in  rent  that  is 
still  to  come.  There  is  no  vested  right  in  the  indefinite  future. 
The  proposal  that  the  future  increment  shall  be  reserved  for  the 
community  was  made  fifty  years  ago,  chiefly  with  reference  to 
agricultural  land,  by  John  Stuart  Mill  and  other  reformers. 
But  the  advantages  of  unrestricted  property  in  agricultural  land, 
especially  where  wide  distribution  of  ownership  prevails,  and  the 
difficulties  in  the  way  of  carving  out  economic  rent  with  any 
accuracy  —  these  considerations  have  led  to  the  rejection  of 
Mill's  proposal,  as  to  agricultural  land,  by  most  economists  of  the 
later  generation.  On  the  other  hand,  with  the  rapid  growth  of 
modern  cities  and  the  unmistakable  swelling  of  site  rents,  a 
reservation  for  the  community's  benefit  with  respect  to  urban  land 
has  met  with  steadily  increasing  recognition. 

Many  persons  of  conservative  bent  object  to  such  proposals  on 
grounds  of  principle.  They  urge  that  this  would  be  only  a  begin- 
ning. Eventually  not  merely  the  increase  newly  accruing  would 
be  appropriated,  but  existing  values  as  well.  Objections  of  this 
kind,  however,  are  urged  against  every  proposal  for  reform,  and 
if  allowed,  would  prevent  any  disturbance  whatever  of  the  status 
quo.  The  day  is  gone  by  when  they  are  felt  to  be  insuperable. 
The  dogma  of  an  unrestricted  right  of  property  and  the  belief  in 
the  expediency  of  the  exercise  of  that  right  without  a  jot  or  tittle 
of  abatement  have  been  shaken  beyond  repair.  The  rights  of 
property  must  prove  themselves  on  examination  in  each  particular 
case,  and  must  submit  to  modification  where  a  balance  of  gain  for 
the  public  can  be  reasonably  expected. 

Less  easy  to  answer  are  the  objections  on  the  score  of  practi- 
cability —  whether  a  legislative  scheme  can  be  devised  in  such  way 
as  to  meet  the  complexities  of  the  situation.  How  proceed?  The 
problem  is  by  no  means  a  simple  one.  The  accruing  increase  of 
rent  is  the  thing  which  it  is  desired  to  divert  to  public  use.  But 
what  emerges  most  openly  is  capitalized  value.  The  easiest  way 
of  adapting  the  machinery  of  taxation  to  the  phenomenon  familiar 


44r-§6]  RENT  {Concluded)  109 

to  all  the  world  is  to  tax  in  proportion  to  the  higher  selling  price  of 
land.  To  tax  the  increase  in  selling  price  may  indeed  seem  to 
accomplish  the  same  end  as  to  tax  the  growing  rent;  since  the  price 
is  but  a  capitalization  of  the  rent.  Yet  there  are  difficulties  and 
complications. 

From  whom  shall  such  taxes  be  collected?  Usually  the  proposal 
is  for  collection  from  the  seller.  This  being  the  case,  the  buyer 
pays  the  full  value  of  the  site,  and  the  seller  is  mulcted  by  the  tax- 
gatherer  for  part  (conceivably  the  whole)  of  the  increase  in  value. 
But  this  process  tends  to  prevent  the  seller  from  parting  with  the 
site;  he  will  hold  it  and  secure  the  site  rent  for  him  self,  rather  than 
sell  subject  to  a  tax.  There  will  be  a  certainty  of  securing  the 
accretion  only  if  the  land  is  periodically  valued,  or  if  its  transfer  by 
inheritance  is  made  the  occasion  of  levying  the  tax.  Periodic 
valuation  is  not  impracticable;  but  it  is  extremely  complex  and 
expensive.  Indeed,  so  expensive  is  it  that  this  alone  is  a  for- 
bidding obstacle;  the  cost  of  ascertaining  the  increment  may  easil}^ 
be  greater  than  the  revenue  secured.  On  ly  if  a  valuation  of  sites  is 
undertaken  in  any  case  for  other  tax  purposes  (the  ordinary  taxes 
on  real  property),  and  if  continuing  records  are  thus  available,  is 
there  likelihood  that  a  substantial  net  revenue  will  be  secured.  It 
would  carry  us  too  far  afield  to  enter  on  a  discussion  of  the  admin- 
istrative and  political  questions  that  must  arise:  the  control  of 
valuations,  the  rights  of  revision  and  appeal,  the  friction  between 
local  and  central  authorities.  No  doubt  difficulties  of  this  tj-pe 
are  often  exaggerated.  They  are  made  much  of  by  those  who  at 
heart  oppose  all  change  and  turn  to  any  and  every  pretext  for 
justifying  their  opposition.  On  the  other  hand,  ardent  reformers 
often  fail  to  face  squarely  the  problems  involved  in  the  legislati^-e 
formulation  of  their  proposals.  No  final  judgment  can  be  rendered 
on  any  scheme  until  it  is  seen  what  it  is  like  in  the  form  of  a  care- 
fully drafted  bill  or  statute. 

There  is  still  another  objection  to  taxes  on  seller's  increment. 
They  are,  so  to  speak,  a  sale  by  the  public  of  its  birthright.  The 
buyer  pays  the  full  capitalized  value,  and  pays  the  increment 
(via  the  seller)  to  the  taxgatherer.    In  effect,  he  buys  a  rent  charge  in 


110  THE  DISTRIBUTION  OF  WEALTH  [44- §6 

perpetuity.  The  state  parts  with  its  principal;  in  consideration 
of  a  sum  paid  in  at  once,  it  parts  forever  with  its  right  to  appropri- 
ate the  accrued  increase  of  site  rent.  This  is  unthrifty,  in  the  same 
sense  in  which  it  would  be  unthrifty  for  an  individual  to  spend  his 
principal  rather  than  his  income.  And  obviously  the  process  con- 
tributes to  the  perpetuation  of  the  leisure  class.  The  buyer  and 
his  descendants  buy  the  right  to  collect  for  the  unlimited  future 
the  site  rent  whose  capital  value  has  been  paid  over  to  the  public. 
It  would  seem  in  principle  much  preferable  to  levy  all  such 
taxes,  whether  their  intent  be  to  capture  a  large  slice  of  increas- 
ing rent  or  a  small  one,  with  reference  to  the  economic  rent  itself. 
This  is  doubtless  not  in  accord  with  existing  practises  in  the 
purchase  and  sale  of  real  property;  and  in  the  United  States  it  is 
also  quite  out  of  accord  with  the  tradition  of  levying  all  local 
taxes  on  the  capital  value  of  property,  not  on  the  income.  Hence 
it  is  a  method  difficult  of  adoption  —  particularly  so  because 
tax  changes  of  every  sort  encounter  more  vehement  opposition 
than  almost  any  other  kind  of  economic  readjustment.  Yet  the 
periodic  assessment  of  site  rent  is  in  itself  not  more  difficult  than 
the  periodic  assessment  of  site  value.  The  increase  of  site  rent, 
or  whatever  part  of  it  is  to  be  secured,  could  be  subjected  to  an 
annual  charge,  with  revaluation  every  five  years  or  every  decade. 
Selling  value  would  adjust  itself  to  the  diminished  share  left  the 
owner,  modified  (as  now)  by  changes  in  interest  rates,  but  not 
affected  (or  less  affected)  by  prospects  of  rise  in  the  rent.  The 
chief  difficulty  inherent  in  this  method  would  appear  for  vacant 
land  —  urban  sites  whose  potential  rents  are  high,  but  which 
for  the  time  being  are  withheld  from  use  by  their  owners.  They 
may  have  high  capital  value,  but  in  their  existing  undeveloped 
state  no  rent  at  all  has  accrued.  To  leave  them  untaxed  would 
contribute  to  keeping  them  undeveloped.  Our  existing  Ameri- 
can system  of  taxing  vacant  land  on  its  capital  value  does  operate 
to  hasten  its  utilization.  Yet  to  tax  it  in  full  on  an  estimated  po- 
tential increase  of  rent  would  be  a  troublesome  matter,  in  view  of 
the  fact  that  all  such  land  cannot  possibly  be  brought  into  use  at 
once  and  all  of  it  cannot  be  made  to  yield  a  rent  at  once.    Some 


44^§6]  RENT  (Concluded)  111 

sort  of  compromise  would  seem  to  be  called  for  —  a  partial  tax, 
perhaps  at  half  rate,  on  such  potential  increases:  enough  to  bring 
pressure  on  the  owner  to  utilize  the  site. 

A  partial  tax,  indeed,  is  all  that  can  probably  be  levied  with 
enduring  public  advantage  on  any  increase  of  site  value,  regard- 
less whether  the  site  be  vacant  or  built  on.  This  limitation  of  the 
application  of  the  principle  results  from  the  aleatory  element 
which  attaches  to  urban  sites.  There  is  some  analogy  to  mines. 
If  every  profitable  mine  were  to  be  taxed  for  its  full  "rent"  (in  the 
sense  of  the  excess  over  ordinary  return  on  the  capital  invested 
in  that  particular  mine)  and  if  on  the  other  hand  every  unprofit- 
able mine  were  left  to  its  own  fate,  mining  ventures  would  not  be 
made.  The  public's  way  of  playing  the  game  would  be  heads  we 
win,  tails  you  lose.  The  case  w^ould  be  similar  if  all  growth  of 
urban  site  rent  were  taxed  in  full  but  all  decline  were  left  uncom- 
pensated. True,  the  analogy  between  mines  and  city  sites  is  not 
complete;  for  the  element  of  chance  in  the  former  arises  because 
of  the  uncertainty  of  the  physical  condition  underground,  in  the 
latter  because  of  the  fickleness  of  urban  demand  for  the  surface. 
But  there  is  the  essential  resemblance  that  in  both  cases  the  in- 
vestment of  capital  on  the  land  or  under  the  land  must  be  made, 
and  that  in  both  it  involves  risk.  In  neither  case  does  rent  accrue 
spontaneously  or  automaticall;^ .  The  full  utilization  of  a  city  site, 
like  the  development  of  a  mine,  calls  for  enterprise  and  judgment, 
and  for  the  irrevocable  sinking  of  large  sums;  and  it  entails  the 
possibility  of  loss  and  failure. 

Such  reasoning  must  not  be  pushed  to  the  conclusion  that  there 
should  be  no  attempt  at  all  to  tax  future  increment.  The  prob- 
lem is  one  of  degree.  Risk  there  is  in  urban  building  ventures; 
but  not  risk  so  great  and  so  all-pervasive  as  to  make  the  outcome 
solely  a  matter  of  chance.  The  constant  buying  and  selling  of 
sites,  the  bargains  in  leases  on  ground  rent,  the  higgling  of  the 
market,  give  a  significant  indication  of  what  is  expected  by  the 
real  estate  fraternity,  and  of  what  return  may  fairly  be  expected 
in  the  way  of  growing  site  yield.  Some  substantial  part  of  the 
reckonable  future  of  sites  can  be  taken  for  the  public  without 


112  THE  DISTRIBUTION  OF  WEALTH  [44-§6 

deadening  the  spirit  of  enterprise  or  hampering  the  full  utiliza- 
tion of  the  land;  always  provided  that  the  legislative  problems 
be  solved,  and  that  the  administration  be  honest  and  efficient. 

Last,  but  not  least,  a  most  troublesome  difficulty  must  be  faced, 
that  of  making  allowance  for  the  general  movement  of  prices. 
If  all  prices  double,  money  rents  of  land  may  be  expected  to 
double  also;  more  slowly,  it  is  probable,  than  the  prices  of  most 
commodities,  but  in  the  end  with  substantially  the  same  rate  of 
advance.  The  special  causes  affecting  each  particular  plot  mean- 
while will  still  be  in  operation,  causing  its  site  rent  to  rise  or 
perhaps  to  fall,  —  to  diverge  more  or  less  from  the  general  trend 
of  prices  and  of  rents.  How  disentangle  the  increment  which 
economic  theory  and  social  policy  would  wish  to  set  aside? 
These  must  be  knotty  problems  even  when  prices  rest  on  the  gold 
standard.  The  gold  standard  ordinarily  prevents  rapid  and  abrupt 
changes;  it  may  assure  stability  for  five  or  ten  year  periods;  but 
it  by  no  means  prevents  fluctuation  over  the  longer  period 
which  must  be  considered  in  schemes  of  increment  taxation. 
The  difficulties  become  almost  insoluble  after  such  a  monetary 
revolution  as  ensued  with  the  Great  War  of  1914-18.  Indeed, 
there  is  no  scheme  of  economic  or  social  improvement  whose 
complexities  are  not  increased  to  an  intolerable  degree  by  such 
fatal  disruption  of  monetary  standards.  All  taxes,  all  rent,  all 
payments,  all  modifications  and  equalizations  of  income,  must  be 
framed  in  terms  of  money;  but  what  should  money  terms  mean  in 
1920  compared  with  those  of  the  years  before  the  cataclysm?  And 
who  can  say  what  they  would  mean  ten  years  after?  ^ 

1  In  1911  Germany  enacted  an  increment  tax  (on  increases  in  urban  site  value) 
which  at  its  maximum  reached  45  per  cent  —  30  per  cent  for  the  imperial  treasury, 
with  a  possible  15  per  cent  in  addition  for  local  bodies.  Great  Britain  in  1909  en- 
acted a  similar  tax  of  20  per  cent.  Based  as  they  necessarily  were  on  the  pecuniary 
values  at  the  time  of  enactment,  they  were  rendered  hopelessly  out  of  accord  with 
their  professed  aims  and  principles  by  the  subsequent  price  revolution.  The  British 
tax  was  repealed  m  1 920 ;  the  repeal  was  defended,  however,  not  on  the  ground  that 
monetary  standards  had  changed,  but  because  of  the  complexity  and  expense  of  land 
valuation  under  any  conditions.  The  German  tax  later  became  merged  in  a  general 
tax  on  all  increases  of  values. 

On  the  general  subject  of  the  taxation  of  sites,  compare  what  is  said  below,  Ghap< 
ter  70,  on  the  taxation  of  land  and  buildings. 


CHAPTER  45 
Monopoly  Gains 

Section  1.  Absolute  monopolies;  industrial  monopolies.  Patents  and  copy- 
rights as  instances  of  absolute  monopolies;  the  grounds  for  creating  them 
by  law,  113  —  Sec.  2.  "Public  service"  monopolies.  Increasing  returns 
and  increasing  profits,  116  —  Sec.  3.  Combinations  and  "Trusts";  un- 
certainty as  to  the  extent  of  their  monopoly  power,  118  —  Sec.  4.  The 
capitalization  of  monopoly  gains  and  problems  as  to  vested  rights,  120. 

§  1.  The  differences  between  natural  agents,  bringing  about 
the  phenomenon  of  rent,  constitute  one  great  cause  of  variations 
in  the  yield  from  labor  and  capital.  Monopoly  is  another.  Rent 
has  often  been  said  to  be  due  to  monopoly,  and  to  be  merely  one 
case  of  monopoly.  But  this  is  not  an  accurate  statement.  The 
characteristic  of  monopoly  is  single-handed  control  over  the  total 
supply.  Rent  is  not  due  to  control  over  the  supply  by  any  one 
landholder  or  by  any  organized  combination  of  landholders;  it  is 
due  to  the  scarcity  of  the  better  sources  of  supply.  But  monopoly 
is  similar  to  land  scarcity  in  that  it  causes  unusual  returns  to 
some  enterprises,  and  so  contributes  to  inequalities  in  the  distri- 
bution of  wealth  and  income.  Of  its  regulation  we  shall  say  little 
here.  The  present  chapter  is  concerned  only  with  its  relation  to 
other  gains  from  the  ownership  of  capital  and  with  its  place  in  the 
theory  of  distribution.^ 

Sundry  classifications  of  monopoly  have  been  proposed.  The 
simplest,  and  that  which  will  suffice  for  such  a  general  survey  as  is 
undertaken  in  this  book,  is  into  absolute  monopolies  on  the  one  hand, 
and  industrial  monopolies  on  the  other.  Absolute  monopolies 
are  those  in  which,  by  law  or  by  ownership  of  all  the  sources  of 
supply,  the  holder's  control  is  complete.  Industrial  monopolies 
are  those  in  which  the  control  over  the  supply,  while  not  com- 

1  Compare  the  chapters  on  Railroads,  Combinations,  Public  Ownership;  Chap- 
ters 62-65. 

113 


114  THE  DISTRIBUTION  OF  WEALTH  [45-§  1 

plete,  is  yet  effective  enough  to  bring  a  state  of  things  different  from 
that  of  competition;  in  which,  even  tho  there  be  no  legal  or  natural 
restriction,  the  nature  of  the  operations  is  such  that  competition  is 
wholly  removed,  or  operative  only  to  a  limited  degree. 

Where  there  is  an  absolute  monopoly,  the  situation  is  com- 
paratively simple.  The  general  principles  involved  have  been 
sufficiently  stated  in  the  chapter  on  Monopoly  Value. ^  The 
monopolist,  if  vigilant  and  shrewd,  will  fix  that  price  at  which  his 
net  profit  is  greatest. 

Copyrights  and  patents  supply  the  simplest  cases  of  absolute 
monopoly  by  law.  During  the  term  of  the  exclusive  privilege, 
the  holder  is  affected  by  competition  only  in  so  far  as  substitutes 
are  available,  —  often  a  considerable  limitation,  yet  by  no  means 
such  as  to  prevent  very  great  gains  from  some  patents  and  copy- 
rights. Among  modern  patents,  those  of  Bessemer  for  making 
steel,  of  Bell  for  the  telephone,  of  McKay  for  the  sewing  machine 
used  in  shoe  manufacturing,  the  Northrop  automatic  loom,  the 
Mergenthaler  linotype  machine,  the  Edison  light,  have  been  con- 
spicuous for  success.  The  justification  for  the  high  incomes  from 
such  patents  is  that  the  prospect  of  securing  them  has  been  a  spur 
to  invention,  and  that,  tho  prices  may  be  above  the  competitive 
level  during  the  term  of  the  patent,  the  public  in  the  end  gains. 
Patents  are  granted  for  a  limited  period,  usually  for  about  fifteen 
years  (this  is  the  term  in  France,  Germany,  and  Austria;  in  Great 
Britain  it  is  fourteen  years,  in  the  United  States  seventeen) .  When 
they  expire,  the  unrestricted  use  of  the  device  is  expected  to  bring 
to  the  community  cheaper  or  better  goods  than  it  would  have  had 
otherwise. 

The  assumption  underlying  patent  laws,  namely,  that  the  im- 
provements would  not  have  been  made  but  for  the  monopoly 
privilege,  in  the  main  is  justified.  Though  some  persons  are  born 
with  an  instinct  for  contrivance,  and  will  be  impelled  to  inven- 
tion as  irresistibly  as  others  will  be  to  literature  or  science,  the 
prospect  of  a  reward  is  in  most  cases  an  indispensable  stimulus; 
needed  perhaps  not  so  much  in  order  to  evoke  contrivance  as  to 
1  See  Chapter  15. 


45-§  11  MONOPOLY  GAINS  115 

direct  it  Into  channels  of  service  to  the  community.'^  This  is  the 
more  the  case  with  patents,  because  they  almost  always  involve 
considerable  risk,  both  for  the  inventor  and  for  those  who  supply 
capital  for  working  the  invention.  Of  the  patents  actually  taken 
out  —  thousands  of  them  annually  in  a  country  like  the  United 
States  —  the  immense  majority  come  to  nothing.  Tho  most  of 
the  failures  were  certain  from  the  start  (all  sorts  of  absurd  or  in- 
significant devices  are  patented),  the  future  of  many,  involving 
much  thought  and  labor,  is  uncertain.  They  may  prove  valuable, 
and  may  prove  worthless.  After  a  patent  has  been  secured  and 
launched,  there  must  often  be  expensive  experimenting  with  fur- 
ther devices  and  improvements.  For  at  least  two  of  the  inven- 
tions just  mentioned  — -  the  Northrop  loom  and  the  Mergenthaler 
printing  machine  —  hundreds  of  thousands  of  dollars  were  spent 
in  preparatory  and  experimental  operations.  In  other  words, 
risks  must  be  run,  and  there  must  be  prizes  to  offset  the  failures. 
If  every  process  that  had  been  worked  out  with  much  labor  and 
large  expenditure  were,  when  perfected,  at  once  open  for  use  to 
every  comer,  the  original  inventors  and  investors  would  have 
much  less  prospect  of  reaping  a  sufficient  reward.  Here,  as  else- 
where, occasional  windfalls,  which  may  seem  out  of  proportion  to 
the  desert  of  the  particular  fortune-winner,  must  be  accepted  as 
part  of  the  encouragement  of  vigor  and  enterprise. 

Much  the  same  can  be  said  of  copyrights.  It  is  true  that  in 
this  case,  more  than  in  that  of  mechanical  inventions,  the  inborn 
bent  of  some  individual  produces  its  effect,  irrespective  of  rewards. 
But  literature  as  well  as  art  shows  not  only  all  degrees  of  merit, 
but  all  shades  of  motive.  In  the  making  of  most  modern  books 
the  stimulus  of  individual  gain  plays  no  small  part.  Legal  pro- 
tection for  the  book  writer  is  peculiarly  necessary;  for  a  book  can 
be  reprinted  verbatim  at  once,  whereas  a  new  mechanical  device 
may  be  often  shielded  from  competition  for  some  time  even  with- 
out a  patent.  Given  the  principle  of  reward  in  proportion  to  use- 
ful activity,  then  copyright  is  a  natural  and  consistent  application 
of  it;  and  those  who,  in  the  absence  of  legal  protection  to  authors, 

1  See  on  this  subject  Taussig,  Inventors  and  Money-makers,  Lecture  L 


116  THE  DISTRIBUTION  OF  WEALTH  l45-§2 

print  their  books  without  making  payment,  are  not  inaptly  termed 
pirates. 

Absolute  monopoMes  resting  not  on  legal  restriction,  but  on 
control  of  natural  resources,  are  rare.  The  diamond  mines  of 
South  Africa,  to  which  reference  has  already  been  made,  afford 
an  instance.  The  owners  of  the  nitrate  beds  in  Chile  have 
effected  a  combination,  and  the  owners  of  the  world's  borax 
supplies  have  consolidated  into  a  single  corporation.  In  both 
of  the  last-mentioned  cases  the  natural  resources  are  supposed 
to  be  limited;  but  there  is  always  in  the  background  the  possi- 
bility of  the  discovery  of  new  supplies  or  of  the  utilization  of 
others  that  are  known  but  are  of  poor  quality.  Hence  the  mo- 
nopoly is  not  unchecked  in  its  control  over  supply.  The  usual 
situation  is  that  so-called  monopolists  of  this  sort  are  in  the  pos- 
session not  of  the  sole  sources  of  production  but  of  the  best,  and 
hence  that  their  gains  are  more  in  the  nature  of  economic  rent 
than  monopoly  gains  in  the  narrower  sense. 

§  2.  Much  more  important  in  the  modern  world  are  industrial 
monopolies.  These  also  are  rarely  quite  unfettered;  but  the 
limitations  on  their  prices  and  profits  come  not  so  much  from  the 
existence  of  poorer  sources  of  supply  as  from  public  regulation 
and  the  possibility  of  competition.  Broadly  speaking,  they  are 
of  two  sorts  —  "public  service"  industries  and  the  familiar 
"trusts." 

"Public  service  industries"  is  a  convenient  phrase  to  designate 
water  supply,  gas  supply,  railways  and  street  railways,  the  tele- 
phone and  telegraph,  electric  lighting,  and  the  like.  These  are 
operations  which  affect  great  numbers  of  people,  which  usually 
call  for  some  special  grant  or  privilege,  such  as  the  right  of  emi- 
nent domain  or  the  use  of  the  public  highways,  and  which  are  best 
carried  on  under  single  management.  The  last-named  characteristic 
is  the  important  one  for  our  present  purpose.  The  advantages  of 
single  management  are  so  great  that  even  tho  there  be  an 
initial  period  of  competition  between  two  or  more  establishments, 
consolidation  is  certain  to  ensue.    The  community  may  as  well 

I  See  Chapter  15,  §  2. 


45-§2]  MONOPOLY  GAINS  117 

accept  once  for  all  the  fact  of  the  monopoly  and  regulate  its  affairs 
accordingly. 

Increasing  returns  in  the  strict  economic  sense  are  a  usual 
characteristic  of  these  industries.  A  single  great  plant  can  do 
the  work  more  cheaply  as  it  gets  larger  and  larger.  It  is  a  waste- 
ful process  to  duplicate  a  railway  line,  the  mains  of  a  water  or  gas 
system,  the  wires  of  a  telephone  or  telegraph  system.  In  the  case 
of  telephones  and  telegraphs  there  is  the  further  circumstance  that 
all  customers  are  better  served  if  all  are  connected  with  a  single 
system.  Sometimes,  it  is  true,  when  the  stage  of  very  intensive 
use  is  reached,  the  duplication  of  a  plant  may  become  necessary; 
there  may  be  need  of  a  second  set  of  main  pipes,  of  duplicated 
railway  tracks  or  an  additional  line.  Even  then  there  are  almost 
always  appreciable  economies  in  managing  the  several  plants  as 
one;  and  in  any  case  it  is  certain  that  so  small  a  number  of  com- 
petitors will  form  a  combination.  Chiefly  because  of  increasing 
returns  in  production,  and  in  any  case  because  of  the  small  number 
of  possible  competitors,  the  emergence  of  single  control  is  inevit- 
able. 

These  industries  bring  increasing  returns  in  another  sense:  not 
merely  increasing  efficiency  of  labor,  but  increasing  pecuniary 
gain.  The  growth  of  numbers  in  the  community  will  commonly 
make  the  single  plant  or  combination  of  plants  more  profitable  as 
the  years  go  on.  A  traditional  price  for  the  product  or  services  is 
fixed  at  the  outset,  which  then  is  usually  a  "fair"  price  —  that  is 
a  price  such  as  yields  no  unusual  gains.  As  time  goes  on  and  pop- 
ulation increases,  expenses  per  unit  decline;  and  improvements 
in  the  arts  often  cause  the  expenses  to  decline  still  more.  But  the 
traditional  price  remains,  competition  is  absent  or  only  intermit- 
tent, and  the  gains  from  the  undertaking  swell.  In  this  gradual 
growth  of  gains,  due  chiefly  to  the  advance  of  the  community  at 
large,  there  is  a  strong  analogy  to  the  rising  rent  of  land  and  es- 
pecially of  urban  sites. 

Some  inventions  of  modern  times  served  greatly  to  increase  the 
gains  in  such  industries.  The  application  of  electricity  to  traction 
enormously  increased  the  efficiency  of  labor  in  street  railways. 


118  THE  DISTRIBUTION  OF  WEALTH  [45-§3 

The  Improvements  in  gas  manufacture,  especially  from  the  use  of 
naphtha  in  making  water  gas,  were  hardly  less  important.  The 
growth  of  cities  would  in  any  case  have  tended  to  make  these  in- 
dustries more  lucrative.  Cheapened  as  their  operations  were  by 
great  advances  in  the  arts,  they  became  sometimes  fabulously 
profitable. 

It  is  part  of  the  irony  of  fate  that  the  half-fortuitous  gains  which 
accrued  for  a  while  from  this  situation,  and  which  were  expected  in 
most  quarters  to  persist  indefinitely,  were  interrupted,  perhaps 
permanently  wiped  out,  by  a  cause  hardly  less  fortuitous.  The 
very  circumstance  which  promised  to  maintain  large  profits 
proved,  under  the  unexpected  conditions  of  a  monetary  revolu- 
tion, the  cause  of  financial  distress.  So  long  as  prices  in  general 
remained  stable,  and  expenses  therefore  not  subject  to  general 
increase  —  invention  and  improvement  meanwhile  steadily  con- 
tinuing —  the  stability  of  the  price  of  these  products  and  serv- 
ices had  promised  high  returns.  But  as  the  prices  of  most  other 
things  and  the  rates  of  wages  tended  to  rise,  the  fixity  of  the  street 
railway  fare  or  gas  prices  became  a  cause  of  financial  embarrass- 
ment. Not  only  tradition,  but  the  growing  effectiveness  of  public 
regulation  prevented  a  rise  in  charges.  The  slow  but  steady  ad- 
vance of  the  price  level  during  the  early  years  of  the  twentieth 
century  tended  steadily  to  pare  down  profits.  The  abrupt  ad- 
vance during  the  war  of  1914-18  brought  the  tendency  to  a  sudden 
climax.  The  public  furiously  and  vociferously  opposed  changes 
from  the  accustomed  scale  of  charges.  Increases  finally  had  to 
be  accepted ;  they  were  as  inevitable  as  those  in  salaries,  in  taxes, 
in  rentals  of  dwellings  and  shops;  but  they  were  sparingly  allowed. 
The  problem  for  the  owners  and  investors  was  no  longer  how  to 
conceal  and  pocket  profits  but  how  to  avoid  losses;  and  the  prob- 
lem for  the  public  became  for  the  time  being  that  of  assuring  the 
maintenance  and  extension  of  essential  industries,  not  that  of 
controlling  the  profits  of  monopolies. 

§  3.  More  troublesome  problems  of  economic  theory,  and  no 
less  difficult  problems  of  public  policy,  are  presented  by  the  so- 
called  "trusts";  that  is,  the  great  horizontal  combinations,  under 


45-§3]  MONOPOLY  GAINS  119 

single  management,  of  a  series  of  separate  establishments.  The 
difference  between  the  monopoly  industries  considered  in  the  last 
section  and  the  trusts  lies  in  the  fact  that  here  there  are  usually  a 
number  of  physically  separate  plants.  A  street  railway,  a  gas 
system,  a  telephone  and  telegraph  net,  a  railway  system  —  each  is 
a  physical  unit.  But  when  a  dozen  sugar  refineries,  or  chemical 
works,  or  lead  factories,  are  united  in  a  trust,  the  separate  plants 
remain  separate,  tho  now  managed  as  one. 

It  must  be  confessed  frankly  that  we  do  not  know,  in  the  pres- 
ent state  of  economic  inquiry,  to  what  extent  effective  monopoly 
is  likely  to  develop  in  such  industries.  If  there  were  a  general 
tendency  to  increasing  returns  from  the  mere  fact  of  concentration 
in  ownership  and  management,  we  should  expect  monopoly  to  de- 
velop without  fail.i  Yet  even  in  the  absence  of  such  a  tendency 
continuously  in  operation,  some  degree  of  monopoly  control  may 
appear.  The  great  combination  or  trust  may  keep  out  rivals  by 
cutthroat  competition,  by  sheer  weight  and  power.  On  the  other 
hand,  large  gains  do  tempt  interlopers,  and  the  constantly  swelling 
volume  of  accumulations  in  search  of  investment  causes  every 
chance  of  securing  large  returns  to  be  sought  out.  There  is  the 
crucial  question  of  management,  too;  the  possibility,  when  once  the 
founders  of  a  great  combination  (usually  men  of  exceptional  ability) 
have  left  the  field,  of  nepotism  and  ossification.  New  blood  may 
api>ear  in  competing  enterprises,  and  an  apparently  secure  posi- 
tion of  dominance  may  be  lost  to  a  later  generation  of  business 
leaders.  To  repeat,  we  are  much  in  the  dark  as  to  the  future  of 
this  remarkable  economic  movement,  and  cannot  be  certain  how 
far  the  range  of  monopolistic  control  and  monopoly  profit  will 
extend. 

This  much,  however,  is  clear:  that  competition  acts  more  slowly 
in  many  directions  than  was  believed  by  the  economists  of  a  gen- 
eration ago.  If  not  complete  monopoly,  a  quasi-monopoly  endur- 
ing for  a  considerable  time  is  likely  to  appear  wherever  industry 
is  conducted  on  a  very  large  scale.  For  an  indefinite  period  some- 
thing more  than  ordinaiy  or  competitive  gains  may  be  secured. 

1  Compare  Chapter  14,  §  3.    See  also  Chapter  65,  on  Trusts  and  Combinations 


120  THE  DISTRIBUTION  OF  WEALTH  [45-§4 

Given  the  constant  enlistment  of  fresh  abiUty  of  a  high  order  in  the 
management  of  the  great  combinations,  and  the  gains  may  be  kept 
very  large  by  mere  force  of  great  size,  great  capital,  great  over- 
awing of  would-be  competitors.  There  is  the  possibility,  even 
the  probability,  of  a  gain  which  is  in  excess  of  interest  and  of  eco- 
nomic rent,  as  these  have  been  analyzed  in  the  preceding  chapters; 
in  excess,  too,  of  "business  profits,"  as  this  sort  of  income  will  be 
analyzed  in  the  chapters  next  following;  a  gain,  therefore,  which 
is  to  be  classed  as  a  monopoly  return. 

§  4.  As  the  rent  of  land  may  be  capitalized  in  the  selling  price 
of  land,  so  monopoly  gains  may  be  capitalized  in  the  selling  price 
of  the  monopolized  piece  of  property.  This  happens  nowadays 
most  commonly  thru  the  mechanism  of  corporations  and  thru  the 
"watering"  of  corporate  securities.  When  a  corporation  having 
some  sort  of  monopoly  advantage  secures  high  returns,  its  shares 
may  yield  large  dividends  and  may  sell  at  a  high  premium;  or  the 
number  of  shares  may  be  increased  or  watered,  and  the  same 
returns  distributed  among  the  owners  in  the  form  of  lower  divi- 
dends on  a  larger  number  of  shares.  The  total  selling  value  of  the 
shares,  whether  of  a  small  number  at  a  high  price  or  of  a  large 
number  at  a  moderate  price,  will  represent  in  either  case  the  capi- 
talization of  the  net  earnings  at  the  current  rate  of  interest  on  in- 
vestments. 

Vested  interests  present  questions  of  the  same  sort  in  the  case 
of  monopolies  as  in  the  case  of  land.  Where  some  kind  of  exclu- 
sive privilege  has  been  expressly  granted  and  monopoly  gains  have 
consequently  arisen,  the  terms  of  the  grant  cannot  but  be  observed. 
Even  where  there  has  been  no  grant  for  a  clearly  specified  term, 
but  only  the  long-continued  maintenance  by  the  public  author- 
ities of  settled  policy,  vested  rights  are  entitled  at  least  to  some 
degree  of  consideration.  Thus,  in  certain  American  cities,  street 
railways  have  no  privileges  for  any  stated  period  of  years  and  are 
subject  to  regulation  at  will.  Yet  where  they  have  in  fact  carried 
on  their  operations  undisturbed  for  an  indefinite  period,  and  where 
purchases  of  securities  have  been  repeatedly  and  continuously 
made  in  the  expectation  that  the  status  quo  will  be  maintained,  the 


45-§4]  MONOPOLY  GAINS  121 

holders  have  a  position  not  very  different  from  those  of  the  land- 
owner who  has  bought  a  site  in  good  faith.  On  the  other  hand, 
where  such  rights  have  been  given  for  a  limited  period  or  in  express 
terms  left  subject  to  public  modification,  the  investor  must  be  held 
to  have  taken  his  risks.  Still  more,  a  future  rise  in  yield  and  in 
selling  value  is  clearly  open  to  appropriation  by  the  public. 


CHAPTER  46 
The  Nature  and  Definition  of  Capital 

Bection  1.  Is  the  distinction  between  interest  and  rent  tenable,  in  view  of  the 
wide  extent  of  differential  gains  of  a  monopoly  sort?  Grounds  for  main- 
taining that  all  returns  from  property  of  any  kind  are  homogeneous,  122 
■ —  Sec.  2.  A  different  conception  of  "  rent "  and  "interest, "  the  two  being 
regarded  as  different  ways  of  stating  the  same  sort  of  income.  "Arti- 
ficial" and  "natural"  capital.  How  measure  the  amount  of  capital?  124 
—  Sec.  3.  The  important  questions  are  on  the  effectiveness  of  competi- 
tion, the  existence  of  a  normal  rate  of  interest,  the  justification  of  in- 
terest, 127. 

§  1.  The  gradations  of  monopoly;  the  analogies  between  mo- 
nopoly gains  and  rent  (in  part  still  to  be  set  forth) ;  the  often  shad- 
owy line  of  demarcation  between  interest  and  the  other  incomes 
from  property  —  all  these  suggest  the  question  whether  the  whole 
conception  of  capital  and  of  income  from  capital  does  not  need 
revision. 

In  recent  times  many  economists  have  questioned  the  validity 
of  the  distinctions  drawn  in  the  preceding  pages  between  the  dif- 
ferent instruments  of  production  and  the  different  sorts  of  return 
to  their  owners.  The  distinction  between  land  and  capital  has 
perhaps  been  most  questioned,  and  with  it  the  corresponding  one 
between  rent  and  interest.  But  the  distinction  between  rent  and 
monopoly  gains  has  also  been  drawn  into  doubt,  and  hence  that 
between  land  and  monopolized  capital  goods.  There  has  been  a 
general  disposition  to  reconsider  w^hat  should  be  included  under  the 
term  "capital,"  and  what  is  the  social  significance  of  the  various 
incomes  accruing  from  the  ownership  of  property. 

There  are  several  tenable  grounds  for  regarding  all  these  incomes 
as  homogeneous.  In  the  first  place,  no  returns  are  earmarked  as 
monopoly  gains  or  as  rent;  none  are  distinguishable  at  sight  from 
simple  interest.  When  it  is  said  that  land  "  yields  "  economic  rent, 
the  phrase  is  used  elliptically ;  so,  also,  when  it  is  said  that  a  patent 

122 


46-§  1]       NATURE  AND  DEFINITION  OF  CAPITAL  123 

or  an  industrial  monopoly  "yields"  a  monopoly  return.  What 
happens  in  the  case  of  land  is  that  the  output  is  large  in  propor- 
tion to  the  labor  or  outlay  in  preparing  or  tilling  it;  and,  in  the 
case  of  monopoly,  that  the  receipts  are  large  in  proportion  to  the 
expenses  of  constructing  the  plant  and  operating  it.  In  either  case 
there  is  an  exceptional  return,  a  surplus  yield.  But  this  is  dis- 
tinguishable from  interest  only  on  the  assumption  that  there  is  a 
well-defined  nonexceptional  return  —  one  normal  for  capital 
subject  to  unfettered  competition.  In  any  concrete  case  there 
is  always  a  difficulty  in  setting  apart  with  precision  that  return 
which  would  be  received  under  competitive  conditions  from  the 
surplus  which  would  disappear  if  competition  were  free. 

Further:  the  divergences  from  the  "normal"  return,  or  simple 
interest,  are  many  and  various.  They  shade  into  each  other  by 
gradations.  All  sorts  of  industries  present  a  differential  element; 
not  only  the  urban  site  in  the  heart  of  a  metropolis  and  the  valu- 
able patent  monopoly,  but  the  factory  established  at  a  "strate- 
gical" point  and  that  which  has  a  quasi-monopoly  of  prestige  and 
trade-mark.  There  are  plenty  of  industries  and  plants  where  for 
very  long  periods  much  more  than  simple  interest  is  secured. 
There  are  others  where  much  less  is  secured.  The  older  writers 
often  described  the  industrial  situation  as  presenting  a  few  cases 
of  monopoly  and  some  other  cases  of  easily  distinguished  "rent"; 
and  then  a  great  stretch  of  industries  having  normal  profits.  But 
this  does  not  truthfully  represent  the  extraordinary  variety  and 
irregularity  of  the  world  as  it  is. 

Again,  in  view  of  the  diversities  in  the  rates  of  return,  it  is  rea- 
sonable to  say  that  monopoly  returns  are  not  separable  from  eco- 
nomic rent.  True,  the  essential  element  of  monopoly,  as  we  have 
defined  it,  is  control  of  the  supply;  and  so  far  as  a  monopolist  has 
this,  he  is  in  a  different  possition  from  the  person  who  has  merely 
a  differential  advantage  in  producing  part  of  the  supply.  But 
complete  monopoly  control  is  very  rare;  some  sort  of  comjjetitive 
or  inferior  substitute  is  commonly  to  be  reckoned  with.  Mo- 
nopoly gains  then  may  be  said  to  be  only  a  variety  of  the  species 
"rent."     And  in  any  case  monopoly  gains  rest  on  the  fact  that 


124  THE  DISTRIBUTION  OF  WEALTH  [46-§2 

the  thing  monopolized  has  high  serviceability  or  utility;  it  yields 
more  in  the  way  of  eventual  satisfactions  than  other  things;  and 
hence  it  may  be  said  to  yield  a  differential  return,  very  much  as  a 
good  water  power  or  a  fertile  field  yields  a  differential  return. 
What  its  owner  gets  is  thus  analogous  to  the  "rent"  derived 
from  a  natural  agent. 

§  2.  Considerations  of  this  kind  have  led  to  a  method  of  ap- 
proaching the  problem  of  property  income  very  different  from 
that  followed  in  the  preceding  chapters.  It  is  said,  and  with  un- 
doubted truth,  that  all  concrete  instruments  of  production  have  a 
derived  value.  They  get  their  value  from  the  utilities  which  in 
the  end  they  bring  about  or  aid  in  bringing  about.  The  income- 
yielding  power  of  a  cotton  mill  results  from  the  price  of  the  cotton 
goods,  which  in  turn  rests  on  the  utilities  of  the  goods  to  consumers. 
The  income-yielding  power  of  a  street  railway  rests  on  the  utilities 
of  rapid  transportation;  that  of  a  house  lot  on  the  agreeableness 
of  dwelling  on  the  site;  that  of  business  premises  on  their  con- 
venience for  making  or  distributing  commodities.  Some  of  these 
instruments  are  more  effective  in  supplying  utilities  than  others 
and  in  proportion  as  they  are  more  effective  are  more  valuable. 
But  all  belong  to  the  same  class:  they  are  immature  utilities,  so 
to  speak,  and  are  valuable  in  proportion  to  the  satisfactions  that 
in  the  end  will  ripen. 

It  is  a  further  development  of  this  train  of  thought,  and  a  fur- 
ther proposed  change  in  phraseology,  to  say  that  every  instrument 
yields  a  "rent"  —  a  rent  not  in  the  older  sense,  but  in  quite  a  new 
sense.  That  "rent"  is  its  yield  or  its  income;  in  the  sense  in  which 
the  possessor  of  a  settled  income  is  styled  (on  the  continent  of 
Europe)  a  "rentier."  It  is  the  net  income  yield  of  the  instru- 
ment, resulting  from  the  utilities  which  the  instrument  provides 
or  aids  to  provide.  Whether  it  be  a  huge  steamship  made  by 
much  labor  or  a  lucrative  city  lot,  the  income  of  the  owner  depends 
on  what  this  concrete  thing  yields  in  the  way  of  addition  to  the 
ultimate  income  of  the  community.  The  one  as  well  as  the  other 
is  based  on  serviceability.  The  owner's  income,  it  is  said,  may 
be  regarded  as  "rent"  or  as  "interest,"  according  to  the  point  of 


46-§2]       NATURE  AND  DEFINITION  OF  CAPITAL  125 

view.  Regarded  as  an  absolute  sum,  it  is  the  rent  of  the  instru- 
ment; regarded  as  a  percentage  of  the  property  or  capital  embod- 
ied in  the  ship  or  the  lot,  it  is  interest.  Capital  being  regarded 
as  homogeneous,  and  as  including  all  the  various  kinds  of  instru- 
ments, all  return  from  it  is  homogeneous.  The  return  is  regarded 
in  a  different  light,  but  is  not  different  in  essentials,  according  as 
we  dub  it  interest  or  rent. 

Pursuing  this  train  of  thought  further,  we  might  say,^  that 
capital  is  of  two  kinds  —  artificial  and  natural.  Natural  capital 
is  that  which  has  been  classed  under  the  general  head  of  "land"  or 
"natural  agents";  artificial  capital  includes  all  instruments  made 
by  man.  Natural  capital  may  be  highly  useful  and  highly  valu- 
able, as  in  the  case  of  a  rich  mine  or  a  deep  harbor  site.  In  that 
case  it  may  be  said  to  contain  or  embody  a  great  deal  of  capital.  A 
street  railway,  or  a  factory  in  which  a  monopolized  article  is  pro- 
duced, may  be  said  also  to  contain  or  embody  an  exceptional 
amount  of  capital.  Their  valuation  is  high;  their  capitalization 
indicates  the  existence  of  a  large  volume  of  capital. 

Evidently  still  another  question  is  here  involved:  how  measure 
the  amount  of  capital?  The  reasoning  just  stated  would  meas- 
ure it  in  terms  of  value.  And  this,  too,  is  the  ordinary  business 
method  of  measurement.  A  mine,  a  railway,  a  parcel  of  real 
estate,  a  factory,  each  is  valued  on  the  basis  of  its  net  income;  it  is 
capitalized.  The  distinctions  sought  to  be  drawn  by  economists 
between  interest,  rent,  and  monopoly  gains  find  no  response  in  the 
world  of  affairs.  There  all  property  is  valued  in  terms  of  its  in- 
come; all  that  brings  in  an  income  is  alike  capital,  and  all  is  meas- 
ured or  capitalized  on  the  basis  of  its  income.  Those  economists 
who  dissent  from  the  older  view  follow  the  business  community's 
way  of  defining  and  measuring  capital.  In  that  older  view,  on  the 
other  hand,  the  definition  of  capital  as  instruments  made  by  man 
led  to  its  measurement  in  a  very  different  way  —  namely,  in  terms 
of  cost,  of  expense,  of  labor.  As  will  appear  later,  these  are  not 
precisely  equivalent  terms  ;2  but  for  the  purpose  of  the  present 

1  With  Professor  A.  S.  Jolinson,  Introduction  to  Economics,  p.  107. 

2  See  below,  Chapter  48. 


126  THE  DISTRIBUTION  OF  WEALTH  [46-§2 

discussion,  discrepancies  between  labor  involved  and  expense 
incurred  may  be  neglected.  In  the  main,  capital  was  measured 
in  the  older  view,  in  terms  of  labor  involved.  Capital  meant 
previous  labor  or  embodied  labor;  and  capital  v/as  more  or  less, 
not  according  to  its  value,  but  according  to  the  amount  of  labor 
involved  and  the  length  of  time  over  which  that  labor  was  spread. 
The  difference  between  the  older  and  the  newer  views  is  similar 
to  that  between  a  "commercial"  and  a  "physical"  valuation  of 
a  railway. 

Pushed  to  its  last  consequences,  this  valuation  principle  leads 
to  some  results  that  take  one  aback.  A  public  debt,  say  in  the 
form  of  a  French  "rente"  (that  is,  a  mere  promise  to  pay  an 
annual  sum),  is  capitalized  in  terms  of  selling  value;  and  it  becomes 
"capital."  A  burden  on  the  community  is  thus  included  under 
the  term  "capital,"  tho  that  term  in  general  indicates  the  useful 
apparatus  of  the  community.  A  naked  patent  right  or  "fran- 
chise," not  yet  attached  to  a  concrete  instrument,  becomes  capi- 
tal. A  perpetual  pension,  such  as  the  English  Parliament  used 
to  grant  to  royal  favorites  or  military  heroes,  becomes  capital;  it, 
too,  can  be  measured  in  terms  of  value  and  capitalized.  Nay,  a 
human  being,  in  so  far  as  he  is  an  instrument  for  production  — 
and  he  may  be  conceivably  regarded  as  such,  just  as  a  slave  is  an 
asset  —  becomes  capital;  and  then  return  to  labor,  as  well  as  in- 
come from  property,  may  be  regarded  as  "interest"  or  "rent."  ^ 

From  still  another  point  of  view,  the  distinctions  between  inter- 
est and  rent  and  monopoly  gains  have  been  discarded  —  namely, 
from  the  socialist  point  of  view.  To  the  socialist  the  difference 
is  simply  between  tweedledum  and  tweedledee.  All  these  incomes 
are  unnecessary  and  unjustified.  All  result  from  a  bad  social  sys- 
tem and  should  be  abolished.  And  it  is  true  that  all  are  alike  in 
that  they  make  possible  the  leisure  class.  This  last  is  the  phe- 
nomenon in  existing  society  which,  when  once  privilege  is  no  longer 
regarded  as  part  of  the  order  of  nature,  most  calls  for  explanation. 

1  This  extreme  application  of  the  reasoning  is  made  by  Professor  I.  Fisher, 
Elementary  Principles  of  Economics,  Chapter  XXIV,  §  1,  and  by  Professor  F.  A. 
Fetter,  Economic  Principles,  Chapter  XVI,  §  1.  Compare  also  J.  B.  Clark,  Distri- 
bution of  Wealth,  Chapter  XXII. 


46-§3]       NATURE  AND  DEFINITION  OF  CAPITAL  127 

Why  should  a  considerable  number  of  able-bodied  persons  live  in 
idleness  and  plenty?  That  the  aged  and  infirm,  the  children  and 
even  the  women  (at  least  the  married  women),  should  not  be  en- 
gaged in  the  ordinary  productive  occupations,  seems  proper 
enough;  but  why  should  healthy  adult  men  and  women  not  labor 
to  contribute  to  the  general  welfare  of  society?  In  the  feudal 
system,  the  privileged  classes  were  at  least  called  on  to  render 
military  service.  In  our  own  society,  they  are  called  on  for  no 
service  at  all.  Is  this  inevitable?  Is  it  just?  Is  not  this  ques- 
tion the  same  for  all  of  the  leisure  class,  and  for  all  of  their  in- 
comes? Do  they  not  all  own  "capital"  and  all  alike  secure  a 
capitalist  income? 

§  3.  Two  important  questions  underlie  these  matters  of  defi- 
nition and  phraseology.  One  is  the  question  of  taxonomy,  of 
cold  classification:  are  there  sufficient  differences  between  the 
various  sorts  of  income  from  property  to  make  different  names 
reasonable  for  the  incomes  and  for  the  kinds  of  property?  The 
other  is  a  question  of  large  social  import:  are  there  grounds  for 
applying  a  different  public  policy  to  the  various  sorts  of  income? 
Both  questions,  as  it  happens,  turn  in  the  end  on  the  same  point : 
is  there  effectiveness  of  competition  as  to  capital  (artificial  capi- 
tal), and  is  there  a  normal  competitive  return  usually  secured 
from  investment  and  needful  in  order  to  induce  investment? 

It  is  clear  that  there  is  not  effectiveness  of  competition  or  equal- 
ization of  return  as  to  "natural  capital"  —  land  and  natural 
agents.  The  better  among  these  agents  yield  more  than  those  less 
good.  So  far  as  there  is  similar  ineffectiveness  of  competition  and 
similar  inequality  in  return  among  the  instruments  made  by  man 
their  yield  presents  no  phenomena  essentially  different  from  those 
of  natural  agents.  But  if  there  be  effective  competition  between 
the  various  forms  of  artificial  capital,  no  one  among  them  will 
permanently  bring  to  its  owner  an  exceptional  or  differential 
return;  then  there  is  interest,  and  interest  only,  on  capital  in  the 
narrower  sense;  and  then  there  is  a  substantial  difference  between 
"interest"  and  "economic  rent." 

On  this  matter  of  the  actual  efficacy  of  competition,  we  must 


128  THE  DISTRIBUTION  OF  WEALTH  l46-§3 

si>eak  with  reserve.  In  some  directions  it  is  clear  that  the  older 
notion  of  full  competition  between  all  forms  of  artificial  capital 
must  be  given  up.  There  are  industries  in  which  large-scale 
operations  and  increasing  returns  lead  inevitably  to  monopoly  — 
such  as  many  of  the  so-called  public  service  industries  —  and  in 
which  the  return  is  in  so  far  analogous  to  economic  rent  in  the 
older  sense.  There  are  the  trusts  and  quasi-monopolies  in  which 
similar  variation  from  a  supposed  normal  return  is  found.  And 
even  in  industries  outside  the  pale  of  monopoly  or  combination 
there  are  extraordinary  variations  in  the  returns  got  by  the  own- 
ers of  factories,  warehouses,  ships;  so  that  there  seems  ground 
for  rejecting  the  whole  supposition  of  equalization  in  yield  from 
artificial  capital,  and  so  for  rejecting  all  distinction  between  rent 
and  interest. 

Yet  in  the  long  run,  for  probably  the  greater  quantity  of  "  ar- 
tificial capital,"  the  matter  takes  a  different  aspect.  Tho  the 
competitive  regime  has  broken  down  over  a  considerable  range  of 
industries,  it  has  not  yet  ceased  to  be  the  prevailing  regime.  Tho 
there  are  great  variations  in  the  returns  secured  by  the  owners 
of  almost  any  form  of  concrete  capital,  these  are  mainly  explicable, 
as  will  presently  appear,^  from  differences  in  the  business  capacities 
of  the  owners.  Setting  aside  the  differences  so  explained,  and 
those  due  to  the  irregularities  of  demand;  having  regard  to  the 
slowness  with  which  new  plant  can  be  made,  and  even  the  greater 
slowness  with  which  old  plant  wears  out;  looking  at  the  long-run 
results  —  we  find  that  there  is  after  all  a  tendency  to  equaliza- 
tion over  a  large  part,  probably  the  larger  part,  of  the  industrial 
field.  If  a  particular  kind  of  artificial  capital  proves  exceptionally 
profitable,  more  of  that  kind  will  be  made,  and  the  return  on  it 
will  be  lowered.  In  this  probability  lies  the  essential  ground  for 
distinction  between  capital  and  land,  interest  and  rent,  competi- 
tive gains  and  monopoly  gains.  If  the  return  on  every  specific 
kind  of  concrete  instrument  were  a  mere  matter  of  accident,  or  at 
least  were  not  subject  to  any  competitive  or  equalizing  influence 
—  then  all  alike  would  be  mere  "rent"  yielders,  and  would  have  a 

1  See  below,  Chapter  49. 


46-§3]       NATURE  AND  DEFINITION  OF  CAPITAL  129 

value  resting  once  for  all  on  the  utilities  provided  thru  them.  The 
conditions  of  demand  alone  would  govern.  In  fact,  however,  the 
conditions  of  supply  affect  the  larger  part  of  the  concrete  instru- 
ments. Only  a  part  are  limited  natural  agents  or  are  shielded 
from  competition  by  a  monopoly  position.  Hence  we  can  speak 
of  a  normal  return,  or  interest,  in  the  one  case,  and  of  rent  and 
monopoly  gains  in  the  other  cases. 

The  same  conclusion  can  be  stated  in  another  way:  there  is  a 
broad  margin  at  which  the  return  to  capital  is  settled  —  settled 
at  that  normal  rate  which  suffices  to  induce  saving  and  accumula- 
tion. Other  gains  to  the  owners  of  concrete  instruments  are 
measured  by  the  excess  above  what  is  got  at  the  margin.  These 
extra  gains  are  in  some  respects  similar  to  economic  rent,  in 
some  respects  different.  Their  extent  and  variety  is  much  greater 
than  was  supposed  by  the  economists  who  first  worked  out  the 
principle  of  rent,  and  the}^  have  a  great  effect  on  the  distribution 
of  wealth.  But  so  long  as  the  broad  competitive  margin  persists, 
they  leave  unaffected  the  distinction  between  the  normal  or 
"earned"  return  on  capital  and  the  excessive  or  "unearned" 
return. 

In  answering  our  first  question,  the  taxonomic  one,  we  have  by 
implication  answered  the  second,  also.  Interest  on  artificial 
capital,  as  settled  under  competitive  conditions,  presents  different 
social  problems  from  those  presented  by  the  rent  of  natural  agents 
or  by  monopoly  gains.  The  one  is  an  inevitable  part  of  the  regime 
of  private  property  ;i  the  others  are  not,  or  at  least  are  inevitable 
only  in  so  far  as  vested  interests  must  be  respected  or  the  exact 
line  between  interest  and  surplus  returns  proves  impossible  to  draw. 
Economic  rent  and  monopoly  gains  are  unearned  returns,  and 
should  be  treated  differently  from  return  on  capital  pure  and  sim- 
ple. This  is  indeed  admitted  by  the  economists  who  are  disposed 
to  treat  all "  capital "  as  homogeneous.  When  it  comes  to  problems 
of  legislation  —  of  taxation,  for  example,  or  matters  of  public 
regulation  —  they  agree  that  the  various  capitalistic  incomes 
should  be  dealt  with  differently:    those  from  the  better  natural 

1  Compare  also  what  is  said  below,  Chapter  55. 


130  THE  DISTRIBUTION  OF  WEALTH  [46-§3 

agents  or  monopoly  industries  should  be  curbed;  those  from 
competitive  capital  should  in  the  main  be  allowed  to  go  their 
way.i  The  socialists,  on  the  other  hand,  hold  that  these  sorts 
of  income  are  alike  unnecessary  and  unjustified,  and  alike  should 
be  swept  away.  It  is  from  this  point  of  view,  at  all  events,  that 
the  question  of  classification  and  nomenclature  is  most  important. 
Economics  is  in  a  special  sense  a  pragmatic  subject.  Its  truths 
are  eminently  truths  in  the  sense  that  they  concern  us.  Its  ans- 
wers are  answers  that  declare  what  we  should  do.  With  regard 
to  any  question  of  classification  and  distinction,  the  test  of  truth 
is,  what  of  it?  what  follows?  In  economics  the  consequences  that 
follow  are  ultimately  consequences  for  general  welfare  and  public 
regulation.  So  considered,  the  question  whether  income-yielding 
property  is  homogeneous,  and  all  the  sorts  of  income  essentially  of 
the  same  sort,  is  to  be  answered  in  the  negative. 

1  Iq  the  main :  compare  Chapter  68,  §  6. 


CHAPTER  47 
Differences  of  Wages.    Social  Stratification 

Section  1.  Differences  of  wages  which  serve  to  equalize  attractiveness  of 
different  occupations;  domestic  servants,  university  teachers,  public 
employees,  131  —  Sec.  2.  Irregularity  of  employment  and  risk  in  their 
effect  on  relative  wages.  Expense  of  training,  133  —  Sec.  3.  Obstacles  to 
free  movement  bring  about  real  differences.  Full  monopoly  rare,  135  — 
Sec.  4.  Expense  of  education  as  an  obstacle  to  mobility,  136  —  Sec.  5- 
Inequalities  of  inborn  gifts  and  social  stratification.  Uncertainty  of  our 
knowledge  concerning  the  influence  of  inborn  gifts,  137  —  Sec.  6.  Non- 
competing  groups,  roughly  analyzed  as  five.  The  broad  division  between 
soft-handed  and  hard-handed  occupations,  141  —  Sec.  7.  Tendency  to 
greater  mobility  in  modern  times.  The  position  of  common  laborers,  144  — 
Sec.  8.  What  differences  in  wages  would  persist  if  all  choice  were  free? 
148  —  Sec.  9.  Why  the  wages  of  women  are  low,  and  wherein  the  labor 
of  women  is  socially  advantageous,  149.  * 

a 

§  1.  Wages  are  commonly  thought  of  as  a  separate  and  clearly 
distinguishable  form  of  remuneration,  appearing  when  one  man 
is  hired  to  work  for  another.  Very  often,  however,  they  are  part 
of  a  mixed  or  combined  return,  as  when  a  farmer  owns  his  land 
and  capital,  and  gets  rent  and  interest  in  addition  to  a  return  for 
his  labor.  In  almost  every  case  where  a  worker  is  not  hired  by 
another  —  a  physician  or  lawyer,  or  an  artisan  working  on  his  own 
account  —  there  is  some  combination  of  returns.  The  theory 
of  wages  should  consider  the  remuneration  of  every  sort  of  labor, 
that  constituting  a  part  of  the  complex  earnings  of  such  indepen- 
dent workmen  as  Avell  as  that  constituting  the  sole  earnings  of  a 
hired  laborer.  But  most  of  the  problems  are  sufficiently  dealt 
with  by  an  examination  of  the  case  of  hired  laborers,  with  inci- 
dental consideration  of  those  not  hired. 

Tho  it  would  appear  logical  to  examine  first  the  causes  which 
act  on  the  general  rate  of  wages,  the  way  is  cleared  by  taking  up 
first  the^causes  of  differencesjn.tlie.earnings  of  various  sorts  of 
labor  ancT  some  other  topics  closely  connected  with  those  differ- 
^  131 


132  THE  DISTRIBUTION  OF  WEALTH  [47- §  1 

ences.  The  theory  of  general  wages  is  reserved  for  treatment  at 
the  very  last.  // ) 

Differences  of  wages  may  be  classed  under  two  h^s  —  those 
that  equalize  the  attractiveness  of  occupations,  aiwthose  that 
persist  irrespective  of  their  varying  attractiveness.  If  choice  be- 
tween occupations  were  perfectly  free,  only  differences  of  the  for- 
mer sort  would  exist.  We  may  begin  with  these,  which  may  be 
called  equalizing  differences. 

If  choice  were  free,  an  agreeable  occupation  would  command  a 
lower  rate  of  pay  than  one  not  agreeable.  Something  would 
need  to  be  given,  in  the  way  of  premium,  to  offset  unattractive- 
ness.  As  between  occupations  of  similar  grade,  open  to  persons 
of  the  same  class,  we  find  differences  that  are  explicable  on  this 
principle.  A  woman  or  girl  working  in  a  factory  or  shop  receives 
in  the  United  States  a  lower  rate  of  pay  than  a  domestic  servant. 
Tho  the  payment  in  money  to  both  is  often  very  nearly  the  same, 
the  servant  receives  in  addition  her  food  and  lodging  and  her  total 
remuneration  is  very  much  higher.  The  main  explanation  is  that 
in  a  democratic  community  domestic  service  is  repugnant;  it  has 
the  associations  of  a  menial  position.  The  shop  girl  often  has  longer 
hours  and  harder  work.  But  her  work  is  of  a  more  impersonal 
sort  and  her  hours  are  strictly  defined.  When  the  day's  work  is 
done  she  is  her  own  mistress.  In  European  countries,  where  the 
spirit  of  freedom  and  the  yearning  for  equality  are  less  awakened 
than  in  the  United  States,  considerations  of  this  sort  count  for  much 
less;  and  domestic  service  there  receives  no  such  comparatively 
high  wages.  American  housekeepers  of  the  well-to-do  class  com- 
plain of  the  scarcity  and  the  high  wages  of  servants,  usually  with- 
out an  inkling  that  these  are  the  results  of  the  spirit  of  democracy.; 

In  another  range  of  occupations  the  principle  is  illustrated  by 
the  pay  of  university  teachers.  Much  has  been  said  of  late  years 
in  this  country  of  the  low  range  of  professors'  salaries.  Very  pos- 
sibly it  is  true  that,  as  compared  with  earnings  in  other  occupa- 
tions of  the  same  grade,  and  for  persons  of  the  same  training  and 
ability,  the  range  has  been  low  —  so  low  as  to  make  the  occupa- 
tion less  attractive  than  it  should  be  to  capable  men.     But  the 


47-§2]  DIFFERENCES  OF  WAGES  133 

calling  has  great  charms.  The  respect  which  it  enjoys,  the  settled 
and  moderate  routine,  the  pleasure  of  intellectual  interest  and 
achievement,  the  long  vacation  —  these  make  it  attractive,  even 
with  pay  less  than  that  of  competing  occupations. 

Peace  of  mind  and  industrial  security,  are  valued  by  most  peo- 
ple; hence  governments  and  large  corporations,  able  to  promise 
continuous  employment,  can  secure  their  employees  at  compara- 
tively low  wages.  Wliere  indeed  public  business  is  not  managed 
oiTsfrictly  fiscal  principles,  this  consequence  does  not  show  itself. 
In  most  democratic  communities,  and  especially  in  the  newer  ones, 
like  the  United  States  and  Australia,  the  government  is  expected 
to  pay  more  than  the  private  employer,  irrespective  of  the  steadi- 
ness and  attractiveness  of  its  work.  The  great  bulk  of  the  work- 
men, tho  they  are  not  in  government  employ,  nevertheless  ap- 
prove of  the  favored  position  of  those  who  are;  partly  because  of 
general  class  sympathy,  partly  because  of  ignorance  of  the  eco- 
nomic effects.  Nothing  is  more  certain  than  that  higher  wages  to 
public  employees  come  out  of  the  pockets  of  the  rest  of  the  com- 
munity. But  such  wages  are  none  the  less  welcomed  by  other  em- 
ployees, because  of  a  notion  that  they  have  an  uplifting  effect  on 
wages  at  large. 

§  2.  Irre^ularit;xj^f_employment,  on  the  other  hand,  may  be 
expected,  so  far  as  competition  is  free,  to  make  wages  higher.  It 
is  said  that  bricklayers  receive  higher  wages  than  carpenters, 
largely  from  this  cause;  their  work  being  more  likely  to  be  inter- 
rupted by  the  weather  and  the  seasons.  So  far  as  the  higher  pay 
per  day  or  per  hour  simply  offsets  the  smaller  time  actually  given 
to  work,  there  is  here  no  difference  in  the  total  remuneration.  But 
if  the  greater  uncertainty  makes  the  occupation  unattractive  to 
most  men,  it  will  cause  the  total  remuneration  to  be  higher.  Un- 
fortunately most  manual  workmen  have  not  the  foresight  and  in- 
telligence necessary  for  discounting  wages  which  seem  high  but 
are  uncertain.  It  may  be  doubted  whether  irregular  or  hazard- 
ous work  usually  yields  wages  in  proportion  to  its  actuarial  worth. 
This  same  undervaluation  of  risk  shows  itself  in  the  attractive- 
ness of  occupations  in  which  there  are  prizes.     The  law  is  a  pro- 


134  THE  DISTRIBUTION  OF  WEALTH  [47-§2 

fession  in  which  there  are  great  possibiHties  —  the  chance  ofji 
jarge  income,  and,  not  least,  the  gHttering  possibiUty  of  success 
and  fame  in  those  pubHc  posts  to  which  the  law  is  the  usual  path- 
way. Hence^  aotwUhstaiiding  the  need  of  an  expensive  training 
and  the  cgrtaiDLtx  of  a  slow  rise  to  full  earnihg  power,  it  draws  more 
men  of  promise  and  capacity  than  any  other  of  the. learned  pro- 
fessions. Again,  the  training  of  an  opera  singer  is  highly  elabo- 
rate and  costly,  and  also  involves  a  large  possibility  of  complete 
failure.  Yet  the  great  prizes  —  the  extraordinary  fees  of  the 
notable  few,  and  their  conspicuous  tho  short-lived  fame  —  attract 
so  many  that  for  the  occupation  as  a  whole  there  is  probably  but  a 
very  moderate  return. 

An  occupation  which  calls  for  a  prolonged  and  expensive  train- 
ing will  have,  ceteris  paribus,  a  relatively  high  reward.  Phy- 
sicianjj__engineers,  lawyers,  must  equip  themselyea..by_ years  of 
study,  and  ordinarily  must  serve  some  sort  of  apprenticeship  even 
after  the  period  of  set  study  has  been  passed.  It  is  obvious  that 
people  will  not  incur  the  required  outlay  unless  there  is  a  prospect 
of  earnings  at  least  in  some  degree  commensurate.  No  doubt  this 
factor  operates  in  combination  with  others,  and  there  is  great  ir- 
regularity in  the  final  outcome.  Not  only  do  prizes  in  an  occu- 
pation affect  the  resort  to  it,  and  lead  people  to  undertake  a  costly 
preparation  without  a  cool-headed  calculation  of  the  chances  of 
success;  but  parents,  thru  whom  the  decision  to  enter  on  a  prolonged 
training  is  commonly  made,  are  not  solely  actuated  by  mere  calcu- 
lations of  gain,  nor  are  they  the  best  judges  of  the  probabilities  of 
gain.  Their  first  wish  is  generally  to  provide  for  their  children 
greater  happiness  in  life,  and  they  will  often  pay  for  an  elaborate 
education  chiefly  for  the  sake  of  the  supposed  social  advantages. 
Often  they  do  not  weigh  w^ith  impartiality  the  question  whether 
their  children  have  the  inborn  qualities  to  profit  by  such  an  edu- 
cation. Qn  the  other,  hand,  any  occupation  whichjequires  expen- 
sive training  is  by  that  fact  closed  to  the  immense  majority  of  the 
people  —  a  circumstance  which,  as  will  presently  be  noted,  is  of 
at  least  as  much  importance  as  any  other  in  explaining  the  effects 
of  education  and  training  on  variations  in  wages. 


47-§3]  DIFFERENCES  OF  WAGES  135 

§  3.  It  requires  but  the  most  cursory  observation  to  show  that 
such  explanations  of  the  variations  in  wages  as  have  just  been 
given  do  not  tell  the  whole  story.  The  broad  fact  Js^  that  t^^ 
attractive  and  easy  employments  do  not  in  general  command  the 
lowest  pay.  It  is  more  nearly  true  that  they  command  the  high- 
est pay.  The  common  laborer  or  the  miner  receives  less  for  his 
hard,  dirty  work  than  the  skilled  workman  for  his  lighter  and 
cleaner  work ;  and  this,  tho  the  latter's  hours  are  usually  the  shorter 
and  his  employment  no  more  irregular.  The  work  of  the  lawyer,  the 
physician,  the  business  man,  is  easier  as  well  as  intrinsically  more 
interesting,  more  varied,  more  attractive,  than  that  of  most  sorts 
of  manual  laborers.  Yet  even  after  due  allowance  is  made  for  the  ex- 
pensive training  called  for  by  these  so-called  "liberal"  professions, 
their  earnings  are  large  as  compared  with  the  sacrifices  they  involve. 

This  discrepancy  between  sacrifice  (work)  and  reward  could  not 
exist  if  choice  between  occupations  were  free.  The  day  laborer 
would  be  glad  to  become  a  mechanic  or  engineer,  or  to  advance 
his  children  to  those  more  attractive  occupations,  if  the  choice 
were  open  to  him.  The  obstacles  are  in  some  small  degree  due  to 
a  quasi-monopoly  in  certain  occupations;  but  in  the  main  they  are 
based  on  the  great  fact  of  long-establishe,d^,SQcial.^§tratification. 

Set  monopoly  of  any  sort  is  becoming  less  and  less  important  in 
the  modern  world.  Legal  monopolies,  such  as  those  of  the  craft 
gilds  of  the  Middle  Ages,  have  disappeared.  Something  analo- 
gous to  craft  monopoly  is  occasionally  aimed  at  by  trade  unions, 
admission  to  a  union  being  restricted  by  high  fees  or  by  limitation 
of  members,  and  employment  permitted,  so  far  as  the  power  of  the 
union  extends,  to  members  only.  In  some  trades  which  retain 
the  handicraft  character,  and  in  which  skill  can  be  acquired  only 
thru  careful  instruction  and  long  practise,  such  restrictions  have 
sometimes  proved  effective.  But Jn  most  industries  the  machine 
t^jids  to  displace  the  tool.  General  ability  rather  than  specialized 
skill  is  required  for  attaining  mastery ;  no  small  knot  of  mechanics 
can  keep  under  their  control  the  art  of  doing  any  one  kind  of  work. 
-Attempted  labor  monopolies  have  usually  broken  down.* 
I  Compare  Chapter  57,  §  2. 


136  THE  DISTRIBUTION  OF  WEALTH  l47-§4 

The  permanently  important  forces  are  not  those  intentionally 
set  in  motion  by  any  group  of  workmen,  but  the  varied  influences, 
direct  and  indirect,  patent  and  obscure,  which  set  up  barriers 
between  the  different  classes  of  society.  They  may  be  considered 
under  three  heads:  expense  of  education  and  training;  the 
subtle  influence  of  environment;  and,  finally,  differences  in  inborn 
gifts. 

§  4.  Expense  of  education,  as  we  have  already  noted,  would 
bring  about,  even  under  free  competition,  higher  wages.  This  is 
most  obviously  the  case  where  the  parents  or  the  young  persons 
themselves  pay  for  the  training.  It  is  so,  even  if  the  training  is 
supplied  gratuitously  in  public  schools  and  colleges;  for  tho  in- 
struction itself  be  gratuitous,  support  must  be  provided.  Only 
if  the  state  were  to  supply  education  of  every  kind  on  the  terms 
which  it  grants  in  the  United  States  for  the  army  and  navy  cadets 
at  West  Point  and  Annapolis,  would  the  burdens  which  education 
entails  be  taken  entirely  from  the  individual's  shoulders.  As 
things  stand,  this  burden  is  not  only  heavy,  but  it  is  one  which,  as 
it  becomes  heavier,  the  poorer  members  of  the  community  can  less 
and  less  undertake  to  bear.  When  the  day  laborer's  child  reaches 
the  age  of  thirteen  or  fourteen  (often  even  earlier)  the  increasing 
expense  of  support  and  the  possibility  of  some  earnings  cause  him 
to  be  taken  from  school  and  set  to  work.  Only  rare  conditions  — 
great  altruism  and  persistence  on  the  part  of  parents,  evidence 
of  exceptional  ability  in  the  child,  charitable  aid  —  enable  him  to 
go  beyond  the  elementary  school.  The  gateway  to  a  more  ad- 
vanced education  is  virtually  closed.  The  child  of  the  mechanic 
and  clerk  goes  a  little  farther  in  his  schooling,  and  is  more  likely 
to  find  his  way  into  the  secondary  school.  Even  so,  the  comple- 
tion of  the  secondary  school  curriculum  is  unusual;  the  path  for- 
ward is  cleared  but  a  little  way.  As  a  rule  those  only  who  them- 
selves have  enjoyed  a  higher  education  and  its  fruits  provide  for 
its  completion  by  their  children  also.  Hence  differences  in  re- 
ward, and  the  social  classes  which  rest  mainly  on  them,  tend  to 
perpetuate  themselves.  The  very  fact  that  a  man  has  had  an 
advanced  education  tends  to  secure  it  for  his  children.    The  very 


47-§5]  DIFFERENCES  OF  WAGES  137 

fact  that  a  laborer  has  not  had  it  is  an  almost  insuperable  barrier 
to  his  children  securing  it. 

Expense  of  education  thus  affects  differences  of  wages  doubly. 
It  affects  them,  thru  the  working  of  competition,  in  lifting  rewards 
^to  a  level  at  least  high  enough  to  make  the  expense  worth  while. 
It  affects  them  also  thru  the  restriction  of  competition,  by  im- 
peding access  to  the  better  places  for  multitudes  who,  were  they 
able,  would  gladly  seek  it. 

Environment,  the  second  among  the  barriers  to  free  movement, 
cannot  be  sGarpIy'  separated  from  education  and  training.  To 
the  factor  of  expense  in  education,  it  adds  another  that  keeps  po- 
tential competitors  from  trying  to  enter  the  more  favored  ranks. 
All  the  associations  of  nurture  and  family,  all  the  force  of  example 
and  imitation,  keep  a  youth  in  the  range  of  occupations  to  which  his 
parents  belong.  In  a  highly  mobile  and  democratic  community 
like  the  United  States,  environment  tells  less  than  in  older  coun- 
tries. But  it  tells  much  in  all  countries.  The  gifted  and  alert 
may  feel  ambition  to  rise,  hut  the  mass  accept  the  conditions  to 
^which  they  are  habituated. 

§  5.  Finally,  we  have  to  consider  differences,  of  inborn  gifts; 
undoubtedly  of  great  and  far-reaching  effect,  yet  in  their  influence 
on  the  broad  phenomena  of  social  stratification  not  fully  under- 
stood. Some  fundamental  questions  relating  to  this  topic  still 
await  positive  answers. 

In  the  eighteenth  century,  the  common  belief  was  that  men  were 
endowed  by  nature  with  the  same  mental  and  moral  gifts.  "The 
difference  between  the  most  dissimilar  characters,  between  a  phi- 
losopher and  a  common  street  porter,  seems  to  arise  not  so  much 
from  nature,  as  from  habit,  custom,  education."  ^  Rousseau  be- 
lieved that  with  proper  education  he  could  shape  men's  capacities 
at  will;  and  Robert  Owen  rested  his  optimistic  social  experiments 
on  the  belief  that,  given  favoring  conditions,  all  men  would  prove 
equally  industrious  and  equally  virtuous.  During  the  nineteenth 
century  the  effect  of  biological  investigation,  under  the  leader- 

1  So  said  Adam  Smith,  Wealth  of  Nations,  Book  I,  Chapter  II,  p.  17,  Cannan'a 
edition. 


.y^. 


138  THE  DISTRIBUTION  OF  WEALTH  [47-§5 

ship  of  Darwin,  was  to  turn  opinion  the  other  way.  It  laid  stress 
on  the  inborn  differences  between  individuals  of  the  same  species, 
"the  transmission  of  variations  from  ancestor  to  descendant,  the 
close  association  of  physical  and  mental  traits.  A  possible  corol- 
lary was  that  the  better  position  of  the  more  favored  classes  re- 
sulted, in  part  at  least,  from  inborn  qualities  transmitted  from 
generation  to  generation.  In  recent  years  more  and  more  atten- 
tion has  been  given  to  the  bearing  of  such  reasoning  upon  social 
phenomena,  with  the  result  that  no  positive  proof  or  disproof  has 
been  given  as  to  the  part  which  natural  endowment  plays  in  sepa- 
rating social  classes. 

Some  differences  in  remuneration  and  in  consequent  social  sta- 
tion are  certainly  due  to  inborn  gifts.  Within  any  one  grade  in 
society,  still  more  certainly  within  any  one  profession,  some  indi- 
viduals have  exceptional  capacity  and  thereby  gain  exceptional 
rewards.  There  are  lawyers,  physicians,  scholars,  poets,  invent- 
ors, business  men,  whom  nature  endowed  with  rare  qualities. 
Education  may  aid  them,  environment  may  hamper,  but  in:^ 
nate  capacity  proves  decisive.  The  influence  of  heredity  is  often 
traceable ;  yet  the  degree  to  which  a  given  talent  or  combination  of 
talents'  shall  be  transmitted  from  ancestor  to  descendant  seems 
subject  to  no  ascertainable  law.  The  fact  of  varying  endowment, 
whether  in  the  way  of  genius  or  of  high  talent,  is  as  unmistakable 
as  its  causes  are  inscrutable.  And  from  this  fact  it  follows  that 
some  individuals  earn  more  than  others,  and  that  great  differ- 
ences in  wages,  under  a  regime  of  competition,  are  inevitable. 

The  more  difficult  question  is  whether  there  are  broad  differ- 
ences in  gifts  of  mind  and  character  among  the  several  social 
classes.  More  particularly  are  the  well-to-do  possessed,  on  the 
whole,  of  qualities  not  possessed  by  manual  laborers?  If  we  could 
go  back  to  the  very  beginnings  of  social  differences,  we  should 
doubtless  find  that  those  who  first  swung  themselves  into  favored 
positions  did  so  by  virtue  of  natural  gifts.  The  earliest  savage 
chiefs  rose  to  command  because  of  superior  strength  or  cunning. 
The  feudal  lords  were  at  the  outset  the  natural  leaders  of  the  clans. 
The  city  merchants  in  whom  we  find  the  origin  of  the  bourgeoisie 


47-§5]  DIFFERENCES  OF  WAGES  139 

were  the  shrewd  and  capable  men  of  their  towns.  The  analogies 
of  heredity  suggest  that  the  qualities  of  such  ancestors  were  trans- 
mitted to  their  descendants,  and  that  the  so-called  higher  classes  of 
modern  times  constitute  a  born  aristocracy.  Tho  heredity  is  ir- 
regular in  its  individual  manifestations,  for  large  numbers  it  shows 
regularity  and  persistence.  Take  a  thousand  children  of  gifted  par- 
ents and  a  thousand  children  of  mediocre  parents;  the  former  will 
prove  the  superior  class,  even  tho  a  sporadic  genius  may  emerge 
among  the  latter.  Can  it  not  be  inferred  that  the  broad  differences 
between  social  classes  rest  on  differences  in  their  inherent  intel- 
lectual and  moral  endowments? 

Further,  it  is  mamtained  that  the  distribution  of  success  in  life 
proves  the  greater  average  gifts  of  the  higher  classes.  Statistics 
concerning  the  notable  men  of  several  countries  (especially  Eng- 
land and  France)  show  that  the  aristocracy,  the  well-to-do  classes 
and  the  town  dwellers,  have  furnished  the  immense  majority  of 
the  men  of  mark  —  the  writers,  statesmen,  soldiers,  industrial 
leaders.  In  proportion  to  their  numbers,  and  as  indicated  by 
achievement,  talent  has  been  vastly  more  abundant.  Even  ge- 
nius has  been  recruited  chiefly  from  their  ranks.  Such  evidence 
is  adduced  as  strengthening  the  view  that Jnborii  gifts_vary.j5dth 
social  classes. 

(!)n  the  other  hand,  it  is  contended  that  this  very  evidence 
shows  the  commanding  influence  of  opportunity  and  environment. 
Any  one  of  intellectual  capacity  who  consorts  with  the  average 
persons  of  the  "superior"  classes,  and  observes  their  narrowness, 
their  dullness,  their  fatuous  self-content,  their  essential  vulgarity, 
must  hesitate  before  believing  that  they  and  their  descendants 
achieve  success  solely  because  of  unusual  gifts.  He  cannot  but 
suspect  that  their  favored  position  must  be  due,  in  large  measure 
at  least,  to  training,  advantageous  start,  fosteriiig_jenA4fomnent. 
If  few  among  the  lower  classes  rise,  it  must  be  because  of  the  re- 
pression of  many  who  are  talented.  Only  those  of  very  unusual 
vigor  and  ability  can  escape  from  the  trammels  of  a  deadening  en- 
vironment. Many  ardent  reformers  are  convinced  that  a  great 
fund  of  capacity,  no  less  in  its  possibilities  than  that  which  is  found 


140  THE  DISTRIBUTION  OF  WEALTH  [47-§5 

among  the  well-to-do,  remains  undeveloped.  Tho  variations 
between  individuals  are  unmistakable,  variations  between  classes 
are  declared  to  be  unproved. 

To  this  it  is  added  that  any  higher  or  favored  class  tends  not  so 
much  to  transmit  to  descendants  the  qualities  by  which  the  ances- 
tors achieved  success,  as  to  become  itself  enervated  and  weakened 
by  continuance  in  privilege.  The  later  generations  of  the  stock 
deteriorate.  It  is  only  by  the  infusion  of  fresh  blood  from  below 
that  vitality  and  strength  are  preserved.  Such  is  said  to  be  the 
lesson  of  history  as  to  royal  and  noble  houses;  such  is  perhaps  the 
tendency  among  the  successful  bourgeoisie.  When  the  conditions 
of  life  are  made  easy  and  the  struggle  for  advancement  becomes 
less  strenuous,  the  unfit  are  no  longer  eliminated  and  the  moder- 
ately capable  are  enabled  to  hold  their  own.  Tho  conspicuous 
success  continues  to  be  attained  only  by  those  of  unusual  gifts 
(whether  born  in  the  lower  classes  or  anjon^  the  well-to-dp)j^ 
the  advantages  of  an  easy  start  and  constant  support  still  enable 
persons  of  mediocre  quality  to  remain  in  the  favored  class  from 
which  they  sprang  and  to  maintain  their  favored  position. 

The  problem  is  unsolved,  and  is  likely  long  to  remain  so.  The 
method  of  experiment  cannot  be  applied  to  it,  as  indeed  it  cannot 
be  in  an  accurate  way  to  social  problems  of  any  sort.  We  cannot 
take  a  thousand  children  of  the  more  favored  classes,  and  another 
thousand  of  the  less  favored,  subject  them  to  precisely  the  same 
influences  of  education  and  environment,  and  watch  their  careers 
thru  life.  Still  less  can  we  do  so  with  successive  generations  of 
their  descendants.  The  method  of  observation  alone  is  available ;  a 
method  hampered  not  only  by  the  limitations  of  the  evidence  and  the 
complexity  of  the  data,  but  by  the  prejudices  of  those  who  conduct 
the  observations.  Tho  the  analogies  from  biology  (where  experi- 
ment in  the  strict  sense  is  applicable)  strengthen  the  view  that  in- 
heritance is  all-pervading,  the  plain  facts  of  everyday  life  prove 
that  opportunity  and  environment  are  of  signal  importance.  Those 
of  inborn  gifts  make  them  tell  with  immensely  greater  ease  if  they 
have  the  advantages  of  education  and  training,  and  of  support 
during  the  early  stages  of  their  career.     Those  of  the  very  highest 


47-§6]  DIFFERENCES  OF  WAGES  141 

gifts  are  doubtless  least  dependent  on  adventitious  aid.  Generals 
probably  are  born,  not  made.  But  colonels  and  captains  can  be 
trained.  In  the  ranks  there  may  be  many  men  who  have  it  in 
them  to  become  good  officers,  yet  are  kept  in  the  ranks  because  no 
way  is  available  for  bringing  out  the  sterling  qualities  which  they 
do  possess. 

§  6.  At  all  events,  whether  from  natural  causes  or  as  the  result 
of  existing  social  conditions,  thj£_ movement  of  labor  from  grade 
to  grade  is  not  free.  Amid  the  great  variety  of  occupations  and  of 
wages,  certain  broad  groups  may  be  distinguished.  These  may  be 
called,  in  the  plirase  introduced  by  Cairnes,  non-competing  groups; 
non-competing  in  the  sense  that  those  born  or  placed  in  a  given 
grade  or  group  usually  remain  there  and  do  not  compete  with 
those  in  other  groups.  For  most  men  it  is  very  difficult,  for  manj- 
it  is  impossible,  to  move  from  the  group  in  which  they  find  them- 
selves into  one  more  favored.  We  may  enumerate,  for  simplicity 
and  convenience  of  exposition,  five  such  groups.  They  are  not 
distinguished  by  sharp  demarcation,  for  they  shade  one  into 
another  by  continuous  gradations;  but  they  are  distinguished 
sufficiently  to  bring  into  relief  some  important  questions  as  to  the 
relations  between  social  classes  and  the  fundamental  causes  acting 
on  distribution  and  on  value. 

(1)  In  the  lowest  group  belong  the  day  laborers,  so-called:  the 
diggers  and  delvers  who  have  nothing  to  oflFer  but  their  bodily 
strength.  No  doubt,  among  these  there  are  some  gradations. 
The  ver}'  capacity  and  willingness  to  labor  continuously,  even  at 
the  simplest  tasks,  thru  nine,  ten,  eleven  hours  a  day,  are  not  pos- 
sessed by  all  men,  still  less  by  all  races,  and  mark  something  be- 
yond the  quite  unskilled  grade  of  common  labor.  But  labor  of 
this  sort  is  common  enough.  Almost  any  adult  is  able  to  do  the 
work.  For  this  group,  even  in  the  most  advanced  countries,  edu- 
cation is  rarely  carried  beyond  the  minimum  which  the  law  requires. 
Children  are  set  to  work  at  the  earliest  age  at  which  they  can  earn 
something.  The  maximum  wages  of  any  individual  are  earned  as 
soon  as  he  is  full  grown,  andJaecome  less  rather  than  greater  as 
middle  age  is  reached. 


142  THE  DISTRIBUTION  OF  WEALTH  l47-§6 

In  the  same  group  belong  those  factory  employees  whose  work  is 
of  the  simplest  sort.  In  every  factory  there  is  a  certain  amomit  of 
"heavy  work"  to  be  done,  for  which  the  common  laborer  is  needed. 
In  agriculture  there  is  always  a  sharp  demand  for  such  labor  at  har- 
vest time  and  some  demand  for  it  thruout  the  year;  tho  the  plan- 
ning and  direction  of  farm  work  calls  for  much  more  than  simple 
muscular  effort. 

(2)  In  the  next  group  belong  those  who,  while  not  needing  spe- 
cialized skill,  yet  bear  some  responsibility  and  must  have  some 

.^ertness  of  mind.  ,  Such  for  example  are  motormen  on  the  street 
jailways.  Most  miners  belong  here,  certainly  in  England  and  in 
Germany.  In  the  United  States,  there  has  indeed  been  a  tendency 
(except  where  machinery  is  used  underground)  to  put  coal  mining 
into  the  hands  of  unskilled  workers.  The  development  of  machin- 
ery and  of  large-scale  establishments  has  created  a  demand  for  an 
immense  number  of  factory  workers  whose  tasks  are  comparatively 
simple  and  often  are  desperately  monotonous,  but  who  yet  must 
have  some  intelligence  in  watching  and  applying  machinery. 
Wages  in  this  group  are  commonly  paid  by  the  week,  not  by  the 
day;  a  circumstance  marking  a  greater  continuity  of  employment 
which  in  itself  constitutes  a  considerable  advance  over  the  situa- 
tion of  the  first  group. 

(3)  In  the  third  group  belong  the  aristocracy  of  the  manual 
laboring  class:  the  skilled  workmen.  Such  are  carpenters,  brick- 
layers, plumbers,  machinists;  the  whole  range  of  occupations  where 
there  is  need  for  a  sure  eye,  familiarity  with  tools,  a  deft  and 
trained  hand.  Tho  machine  processes  have  displaced  in  large 
degree  the  handicrafts,  the  workman  skilled  at  a  trade  is  still  in 
many  directions  indispensable.  Further,  the  development  of 
machinery  has  itself  called  for  a  great  class  of  workmen  capable  of 
making,  repairing,  and  adapting  machines.  Specialized  skill  at  a 
particular  trade  may  be  less  certain  to  command  as  high  a  reward 
as  in  former  days,  because  so  largely  threatened  by  competition 
from  the  machines;  but  general  mechanical  ability  is  in  constantly 
growing  demand.  It  is  among  workmen  who  possess  such  ability 
that  trade  unions  are  strongest.     Some  accumulation  of  prop-"" 


47-§6]  DIFFERENCES  OF  WAGES  143 

erty  is  possible,  by  deposit  in  the  savings  banks  or  by  o\\Tiership 
of  a  dwelling.  Some  pride  in  the  occupation  is  developed,  and  a 
^trong  spirit  of  independence.  Education,  too,  is  carried  further 
than  in  the  lower  classes.  The  children  are  usually  put  thru  the 
entire  curriculum  of  the  elementary  (grammar)  school,  and  are 
prepared  by  apprenticeship  or  otherwise  for  a  particular  trade. 

(4)  ,Next  comes  the  group  that  approaches  the  well-to-do :  the 
lower  middle  class,  which  avoids  rough  and  dirty  work,  and  aims 
at  some  sort  of  clerical  or  semi-intellectual  occupation.  Here  are 
clerks,  bookkeepers,  salesmen,  small  tradesmen,  railway  conduc- 
tors, foremen,  superintendents,  teachers  in  the  lower  grades.  Edu- 
cation m  this  group  is  carried  further;  for  parents  are  more  ready 
and  better  able  to  support  children  thru  a  long  period.  The  sec- 
ondary school  (high  school  or  academy)  is  usually  entered,  and 
very  often  attended  thru  its  entire  course.  Marriage  takes  place 
at  a  somewhat  later  age;  and  some  endeavor  at  saving  or  accumu- 
lation is  almost  always  made.  There  is  commonly  a  feeling  of 
contempt  for  the  manual  laborers  of  all  sorts,  whether  skilled  or 
unskilled,  and  a  demarcation  of  social  feeling  that  does  not  corre- 
spond to  differences  in  wages;  for  in  modern  communities,  the  rate 
of  pay  in  this  fourth  class  is  often  little  different  from  that  in  the 
third  class. 

(5)  Finally  we  reach  the  class  of  the  well-to-do;  those  who  regard 
themselves  as  the  highest  class  and  certainly  are  the  most  favored 
class.  Here  are  the  professions,  so  called  —  the  lawyers,  phy- 
sicians, clergymen^  teachers  of  the  higher  grades;  salaried  officials, 
public  and  private,  in  positions  of  responsibility  and  power;  not 
least,  the  class  of  business  men  and  managers  of  industry,  who 
form  in  democratic  communities  the  backbone  of  the  whole  group. 
The  associations  are  with  property  and  accumulation,  and  the 
common  aim  is  not  merely  to  procure  a  suitable  support  but  to 
save  money  or  to  make  money.  Education  is  carried  to  the  highest 
level,  commonly  thru  the  secondary  school,  often  thru  the  college 
or  university.  Earning  power  does  not  begin  early.  Not  only  is 
there  a  long  period  of  training  and  education,  but  an  additional 
stage  of  slow  start  and  slender  beginnings;  while  an  increase  of 


144  THE  DISTRIBUTION  OF  WEALTH  [47- §7 

earning  power  thru  life  or  at  least  thru  middle  age  is  confidently 
expected.  Marriage  is  delayed  until  late  —  often  too  late  for  full 
happiness.  The  wives  are  largely  ornamental;  they  are  not  expected 
to  do  household  work  or  even  to  undertake  the  full  care  of  their 
children,  but  are  given  the  aid  of  servants.      "^     ——'---     . .      — ' 

The  first  three  groups,  including  the  manual  laborers  of  all  kinds, 
constitute  a  class  by  themselves,  not  only  because  the  gradations 
of  wages  are  continuous  but  because  their  members  have  the  same 
point  of  view  and  the  same  prejudices.  They  ex^sct  usually  to 
live  on  their  wages,  not  looking  to  the  accumulation  of  property 
or  to  an  income  derived  from  property.  There  is  a  common  sense 
of  dependence  on  manual  labor  and  a  common  sense  of  separation 
from  the  well-to-do  and  possessing  class.  The  last  two  groups 
have  similar  feelings  of  solidarity.  Even  tho  there  are  great  va- 
riations in  possessions  and  income  among  them,  all  have  the  habits 
and  hopes  and  prejudices  of  the  well-to-do.  They  share  a  feeling 
that  manual  labor  is  beneath  them,  and  their  garb  indicatesjthejr 
freedom  from  it  —  no  jumpers  or  overalls.  Their  hope  is  for._ 
accumulation  and  investment,  and.J;heir  ambition  is  primarjly 
to  swing  themselves  into  the  position  of  the  leisure  class.  Busi- 
_ness,:z=-Jthat  is,  the  management  and  direction  of  industry,  and 
work  close  to  such  management  —  is  the  core  of  their  doings.  We 
may  thus  divide  the  workers  into  the  two  great  classes  of  the  soft 
handed  and  the  hard  handed.  Those  who  do  not  labor  at  all — 
the  owners  of  property  yielding  income  —  belong  in  the  strict  eco- 
nomic sense  in  a  group  by  themselves:  their  income  is  not  wages  of 
any  sort,  but  interest  or  rent  or  monopoly  gain.  But  in  a  larger 
sense  they  are  in  the  same  class  with  the  upper  groups  of  the  wage- 
earners  and  especially  with  the  highest  and  most  favored  group, 
sharing  the  same  traditions,  and,  not  least,  intermarrying  with  the 
members  of  that  group. 

§  7.  In  modern  times,  and  especially  in  democratic  communi- 
ties, the  barriers  which  separate  the  groups  tend  to  be  broken 
down,  and  passage  from  one  to  another  becomes  more  easy.  We 
may  consider  first  how  these  changes  affect  the  lowest  group, 
that  of  common  laborers. 


47-§7]  DIFFERENCES  OF  WAGES  145 

There  always  has  been  and  there  always  will  be  much  hard,  dirty, 
common  work  to  do;  aijxi  there  always  has  been  and  there  always 
will  be  a  desire  on  the  part  of  the  powerful  or  favored  social  classes 
to  get  others  to  do  this  work  for  them.  Hence  slaver}^  in  ancient 
times  and  serfdom  in  the  Middle  Ages.  In  modern  times  we  have 
negro  slavery,  Chinese  and  coolie  labor,  unskilled  common  labor. 
For  such  there  is  an  insistent  demand:  in  building  railways,  dig- 
ging sewers,  handling  the  crops,  delving  in  the  mines  —  all  the 
tasks  for  which  simple  muscular  energy  is  needed.  Here  are  the 
helots  of  society.  As  to  them,  it  is  far  from  being  true  that  unat- 
tractiveness  in  an  occupation  causes  wages  to  be  high.  The  re- 
verse is  more  nearly  true.  The  hardest,  dirtiest,  least  attractive 
work  gets  the  lowest  pay. 

Evidently,  in  a  free  society  the  explanation  of  the  low  wages  tft"^ 
this  group  must  be  that  there  are  very  many  persons  who  can  do 
such  wor¥^and  can  do  lio  other.'Their  offer  of  abundant  labor 
forces  waues  down,  and  they  are  prevented  from  making  their  way 
to  the  more  favored"  group  by  the  obstacles  of  environment  and 
lack  of  training  or  by  deficiency  of  inborn  qualities.  So  far  as  these 
obstacles  are  abseirt"br  are  weakened,  there  will  be  a  constant  en- 
deavor to  get  out  of  the  lowest  group;  therefore  a  constant  seepage 
into  the  groups  above  and  a  tendency  towards  equalization  of 
wages.  This  movement  for  escape  from  the  lowest  group  is  strong 
in  the  United  States.  All  the  influences  of  a  democratic  society—' 
—  the  absence  of  rigid  class  distinctions,  the  atmosphere  of  free- 
dom, the  education  of  the  public  schools  —  tend  to  break  down 
the  barriers  between  groups.  The  position  of  the  common 
laborers  in  the  United  States  (that  is,  in  the  Northern  and  West- 
ern states)  has  been  kept  at  its  low  level  only  by  the  continued 
inflow  of  immigrants.  Those  of  the  second  generation  among  the 
foreign-born  usually  swing  themselves  into  the  second  and  third 
groups.  The  public  schools,  both  by  the  direct  effect  of  their 
training  and  still  more  by  their  indirect  effect  in  breaking  the 
thralls  of  environment,  open  the  way  to  something  better.  But  dur- 
ing half  a  century  and  more,  ever  fresh  streams  of  immigrants  have 
brought  new  supplies  of  common  laborers,  taking  the  places  left 


146  THE  DISTRIBUTION  OF  WEALTH  l47-§7 

vacant  as  the  children  of  their  predecessors  have  made  their  way 
into  the  higher  groups.  First  came  the  Irish,  whose  great  move- 
ment set  in  after  the  Irish  famine  of  1846;  then  the  French  Cana- 
dians; later  the  Italians,  Hungarians,  Poles,  and  the  varied  races 
of  eastern  Europe.  These  constant  new  arrivals  kept  down  the 
wages  of  the  lowest  group,  and  accentuated  also  the  lines  of  social 
demarcation  between  this  group  and  others. 

A  rate  of  pay  for  common  laborers  much  lower  than  that  for 
other  laborers  is  assumed  by  most  people  to  be  part  of  the  order  of 
nature.  But  it  is  by  no  means  a  matter  of  course,  and  it  is  very 
much  a  matter  for  regret.  Freedom  in  the  choice  of  occupations 
is  one  of  the  most  important  conditions  of  happiness,  and  the  tra- 
ditional position  of  common  labor  is  due  to  the  absence  of  such 
freedom.  The  disparities  in  earnings  and  in  social  position  of 
which  this  is  the  most  glaring  are  not  consistent  with  the  ideals 
that  are  dominating  the  civilized  world.  They  are  most  of  all 
inconsistent  with  the  aspirations  of  democracy.  It  is  probable 
that  even  with  the  removal  of  all  artificial  barriers  to  free  move- 
ment, common  labor  would  still  remain,  as  its  present  name  im- 
plies, the  most  common  and  the  least  paid.  But  such  discrepn 
ancies  as  the  world  has  hitherto  accepted  as  a  matter  of  course  are 
not  inevitable.  They  bring  grave  social  dangers,  in  the  intjensifi- 
cation  of  class  prejudices  and  class  struggles.  They  bring  a  false 
attitude  in  the  rest  of  the  community  toward  all  manual  labor  — 
an  unworthy  contempt  for  indispensable  Vv^ork.  An  elevation  of 
this  group  to  a  plane  of  higher  pay  and  better  social  regard  would 
indeed  mean  that  other  groups  would  be  relatively  worse  off  — 
they  would  no  longer  secure  the  fruits  of  hard  labor  on  cheap 
terms;  but  it  would  mean  a  better  distribution  of  happiness. 

It  is  on  grounds  of  this  sort  that  the  exclusion  of  Chinese  from 
the  United  States  is  to  be  justified.  Such  labor  as  theirs  was  much 
"needed"  on  the  Pacific  Coast  in  earlier  days  —  "needed"  in  the 
sense  that  there  were  very  few  who  could  be  got  to  do  it  for  the 
wages  deemed  by  tradition  adequate  for  the  work.  On  strictly 
economic  grounds  it  was  advantageous  to  the  rest  of  the  com- 
munity.   But  a  permanent  group  of  helots  is  not  a  healthy  con- 


47-§7]  DIFFERENCES  OF  WAGES  147 

stituent  of  a  democratic  society.  It  is  on  the  same  grounds  that 
the  position  of  the  negro  in  the  Southern  states  is  matter  for  grave 
anxiety.  His  indefinite  continuance  as  a  semi-servile  laborer  is 
not  consistent  with  high  social  ideals ;  yet  his  freedom  to  move  into 
better  conditions  (so  far  as  his  innate  qualities  permit)  is  resisted 
not  only  by  the  selfishness  of  other  groups  but  by  all  the  strength 
of  bitter  race  prejudice.  The  question  of  the  restriction  of  immi- 
gration into  the  United  States  is  to  be  decided  chiefly,  in  my  judg- 
ment, from  this  same  point  of  view.  If  immigration  means  the 
perpetuation  of  a  low  economic  and  social  stratum,  it  should  be 
restricted.  But  if  those  who  come  in  are  transformed  in  due  time 
—  their  children,  if  not  themselves  —  into  free  and  mobile  mem- 
bers of  the  community,  the  country  may  accept  them  with  little 
misgiving.  The  immigrants  themselves  certainly  gain  from  the 
very  beginning,  by  finding  better  conditions  and  better  pay  than 
in  their  native  countries;  they  do  hard  work  on  cheap  terms  for 
the  rest  of  the  community;  and  their  stagnation  in  the  lowest  group 
may  be  condoned  if  it  is  but  a  temporary  stage. 

The  spread  of  education  and  the  breaking  of  the  shackles  of 
environment,  which  make  it  easier  for  the  lowest  group  to  rise, 
have  had  their  effects  on  the  relations  of  other  groups  also.  Clerks, 
salesmen,  and  the  Uke  were  formerly  shielded  in  some  measure 
from  competition,  and  so  maintained  in  a  favored  position,  by  the 
difficulty  of  getting  the  book  learning  (simple  tho  it  may  be)  which 
their  calling  requires.  The  public  school  and  especially  the  pub- 
lic high  school  have  changed  all  this.  There  is  a  plethora  of  per- 
sons qualified  to  do  such  work  and  a  consequent  tendency  for  their 
wages  to  fall  rather  than  to  rise.  The  earnings  of  a  good  mechanic 
are  in  the  United  States  higher  than  those  of  the  average  clerk. 
None  the  less  the  resort  to  the  clerk's  trade  shows  no  sign  of  abat- 
ing. This  is  due  in  good  part  to  its  association  with  the  manage- 
ment of  business  and  to  the  possibility  of  advancementto  a  post  df 
command  —  the  alluring  tho  decepTTve  chance  of  a  prize.  But  it 
is  due  chie%Jo  a  traditional  contempt  for  manual  labor.  The'ex^ 
ternals  of  the  leisure  classes  are  aped.  This  conventional  and 
irrational  feeling  against  "dirty  work"  is  indeed  likely  to  give  way 


148  THE  DISTRIBUTION  OF  WEALTH  [47-§8 

as  the  pecuniary  advantage  of  the  mechanics'  group  becomes  more 
pronounced  and  more  famiUar.  In  time  people  adjust  their  notions 
of  social  superiority  to  earnings.  Any  occupation  that  pays  well 
is  likely  in  the  end  to  be  respected,  just  as  any  person  (or  family) 
having  a  sufficient  fortune  is  likely  in  the  end  to  be  accepted  by 
the  so-called  upper  classes.  Yet  such  changes  in  the  conventional 
hierarchy  of  society  take  place  but  slowly.  The  esteem  in  which 
an  occupation  is  for  the  time  being  held  is  a  powerful  part  of  its 
attractions;  and  the  more  open  is  competition,  the  more  will  peo- 
ple move  into  those  occupations  which  are  supposed  to  bring 
social  superiority. 

§  8.  What  would  be  the  differences  in  wages,  and  to  how  great 
an  extent  would  groups  and  classes  persist,  if  all  had  the  same  op- 
portunities, and  if  choice  of  occupation  were  in  so  far  perfectly 
free?  Would  wages  then  differ  only  so  far  as  they  might  be  af- 
fected by  attractiveness,  risk,  and  other  causes  of  equalizing  vari- 
ations? Would  coarse  manual  labor,  for  instance,  then  receive  a 
reward  nearly  as  high  as  any  other  labor,  nay  conceivably  (since 
the  work  is  dirty  and  disagreeable)  higher  than  any  other?  Would 
the  soft-handed  occupations  lose  entirely  the  advantage  in  pay 
which  they  now  commonly  have? 

The  answer  must  depend  on  our  views  concerning  the  limitation 
of  natural  abilities.  It  is  clear  that  some  gifted  individuals  —  a 
few  men  of  science  and  letters,  inventors  and  engineers,  business 
men  and  lawyers,  physicians  and  surgeons  —  would  tower  above 
their  fellows,  and  would  obtain  in  a  competitive  society  unusual 
rewards.  But  would  physicians  as  a  class  secure  higher  rewards 
than  mechanics  as  a  class?  They  would  do  so  only  if  the  faculties 
which  a  capable  physician  must  possess  are  found  among  man^iiid-^ 
in  limited  degree.  And  mechanics  in  turn  would  receive  wages 
higher  than  those  of  day  laborers  only  if  it  proved  that  but  a  limited 
number  possessed  the  qualities  needed.  On  this  crucial  point,  to 
repeat,  we  are  unable  to  pronounce  with  certainty.  What  are  the 
relative  eflfects  of  nature  and  of  nurture  in  bringing  about  the 
phenomena  of  social  stratification,  we  cannot  now  say. 

One  thing,  however,  is  clear:  it  is  much  to  be  desired  that  this 


47-§9]  DIFFERENCES  OF  WAGES  149 

fundamental  question  be  put  to  the  test.  The  removal  of  all  arti- 
ficial barriers  to  the  choice  of  occupation  is  the  most  important 
goal  of  society.  Given  this,  the  innate  faculties  of  all  will  be 
brought  to  bear  and  all  will  bring  to  the  social  dividend  whatever 
it  is  in  them  to  contribute;  while  at  the  same  time  the  most  per- 
fect freedom  will  be  secured  and  thereby  probably  the  most  even 
distribution  of  happiness. 

§  9.  The  wages  of  women  are  lower  as  a  rule  than  those  of  men. 
This  is  due  to  a  variety  of  causes. 

Partly  it  is  due  to  their  lower  physical  strength  and  less  general 
efficiency.  They  are  in  many  sorts  of  work  less  productive  than 
men,  aii3  therefore  paid  less  highly  —  an  instance  of  inevitable 
differences  in  wages,  such  as  would  persist  even  if  choice  of  occu- 
pations were  entirely  free.^ 

In  some  degree,  choice  of  occupations  is  not  entirely  free  for 
women.  Custom  and  lack  of  training  long  have  shut  them  out 
Jrom  some  occupations.  But  in  modern  times,  and  especially  in 
a  country  like  the  United  States,  obstacles  of  this  sort  are  becom- 
Jng  steadily  less  and  probably  have  no  longer  any  far-reaching 
effect.  Education  for  women  is  widespread  and  accessible  and 
tradition  does  not  stand  obstinately  in  their  way  for  any  occupa- 
tion for  which  they  are  really  qualified.  Some  women,  indeed, 
may  be  said  to  be  in  a  non-competing  group,  having  an  unfortu- 
nate place  within  the  occupations  of  their  own  sex.  Such  are 
needlewomen,  able  to  do  this  familiar  work  of  their  sex  and 
unable  to  do  anything  else.  Not  so  very  long  ago  such  work  held 
the  same  place  for  women  that  common  day  labor  does  for  men. 
It  was  the  one  thing  every  woman  could  do,  and  the  only  thing 

1  To  cite  one  item  of  characteristic  testimony:  among  the  shirt-waist  workers  of 
New  York  "the  testimony  of  both  employers  and  employees  was  unanimous  that  if 
a  man  and  a  woman,  who  had  worked  the  same  number  of  years  at  the  trade,  sat 
side  by  side  at  the  same  machines,  and  had  been  paid  precisely  the  same  rate  per 
piece,  the  man  would  earn  anywhere  from  25  to  75  per  cent  more  than  the  woman. 
The  explanations  were  that  a  man  worked  faster,  was  stronger  and  more  enduring; 
that  women  couldn't  do  the  higher  parts  of  the  work;  that  a  man  works  harder  and 
faster  and  longer  because  he  has  to,  has  a  family  to  support,  'while  a  girl  is  only 
working  until  she  get.s  married.'  "  Mr.  Woods  Hutchinson  in  The  Survey,  January 
22,  1910. 


150  THE  DISTRIBUTION  OF  WEALTH  [47-§9 

that  most  women  could  turn  to  when  they  had  to  earn  their  living. 
But  the  range  of  available  occupations  has  greatly  widened  during 
the  last  generation  or  two,  and  there  is  less  congestion  of  work- 
seeking  women  in  any  one  corner. 

Most  important  of  all,  in  the  modern  competition  of  women 
for  work,  is  the  circumstance  that  as  a  rule  they  have  to  support 
themselves  only,  and  often  not  even  that.  Most  women  em- 
ployed in  factories  or  shops  are  at  work  for  but  a  limited  time, 
looking  forward  to  marriage.  They  live  in  their  homes,  and  their 
earnings  are  part  of  the  family  earnings.  They  are  "subsidized." 
Not  a  few  married  women  are  subsidized  in  the  same  sense;  they 
earn  extra  pennies.  For  a  man,  wages  must  normally  be  enough 
to  enable  a  family  to  be  supported  and  reared.  The  great  niajority 
of  working  women  are  not  in  this  case.  Hence  they  are  willing  to 
work  for  wages  less  than  would  suffice  to  maintain  a  family;  and 
there  being  many  of  them,  they  must  offer  their  services  on  terms 
that  will  secure  the  employment  of  all.  Some  among  them,  it  is 
true,  do  have  to  support  a  family  —  widows,  elder  sisters,  and  the 
like;  and  these  must  accept  the  same  wages  as  the  rest.  Con- 
versely, among  men,  bachelors  get  the  same  wages  as  fathers  of 
families.  Such  disparities  between  needs  and  earnings  are  the 
inevitable  outcome  of  competitive  industry. 

Since  women  work  for  lower  wages  than  men,  it  might  be  ex- 
pected that  they  would  displace  the  men  wherever  they  could  do 
the  work.  So  far  as  the  women  are  really  as  efficient  as  men,  this 
result  ensues;  in  such  occupations  for  example  as  typewriting, 
stenography,  light  factory  work,  much  selling  over  the  counter  in 
retail  shops.  The  men  who  formerly  did  this  work  must  find  some- 
thing else  to  do;  and  tho  the  shift  is  not  often  easy  or  quick,  it 
usually  takes  place  in  the  end  without  serious  loss.  Sometimes, 
however,  while  women  displace  men  in  part,  they  cannot  do  so" 
entirely.  A  certain  proportion  of  men  must  often  be  maintained. 
Thus  in  the  composing  room  of  printing  establishments  women  can 
do  much  of  the  work  as  well  as  the  men ;  they  can  operate  some  of 
the  typesetting  machines  as  well,  and  can  set  most  type  as  well. 
But  for  the  heavier  or  more  exacting  work  men  must  be  kept,  and 


47-§9]  DIFFERENCES  OF  WAGES  151 

they  then  are  employed  side  by  side  with  the  women.  The  situation 
is  similar  in  the  public  high  schools.  Most  high  school  teaching 
is  done,  at  least  in  the  United  States,  by  women.  But  some  men 
there  must  be,  if  only  for  the  better  maintenance  of  discipline; 
and  indeed  the  juster  opinion  is  that  secondary  education  would 
be  much  improved  if  the  proportion  of  men  were  greater.  When 
men  and  women  thus  work  side  by  side,  doing  apparently  the  same 
work,  they  yet  receive  different  wages.  The  specious  cry  of 
"equal  pay  for  equal  work"  is  sometimes  raised  in  such  cases; 
tho  in  fact  the  work  is  not  equal,  for  the  men  could  not  be  com- 
pletely replaced  by  women  without  loss  in  efficiency.  Where 
work  (that  is,  eflSciency)  is  in  fact  equal,  the  action  of  competition 
will  in  the  end  make  pay  equal  —  equal  at  the  lower  level,  if 
enough  capable  women  can  be  found,  and  equal  at  the  higher 
level  if  men  must  still  be  enlisted.  This,  we  say,  will  be  the  out- 
come in  the  end.  But,  as  in  all  such  adjustments,  there  may  be  a 
period  of  transition  and  experiment,  during  which  the  practises  of 
industry  have  not  yet  accommodated  themselves  to  the  forces  of 
competition;  and  during  such  a  period  the  tradition  that  women's 
wages  are  lower  than  men's  doubtless  has  its  effects  on  relative 
wages. 

The  emplojTnent  of  unmarried  women  is  in  the  main  a  gain  for 
society  and  a  gain  for  the  women.  This  is  even  more  true  of 
women  from  the  well-to-do  classes  than  of  their  poorer  sisters.  It 
is  better  that  they  should  be  at  work,  rather  than  idling,  during 
the  period  when  they  are  looking  forward  to  marriage;  and  what 
they  produce,  even  tho  it  be  not  turned  out  with  great  efficiency 
or  for  wages  as  high  as  they  would  like,  adds  to  the  social  income 
as  well  as  their  own  income.  Their  being  at  work  is  often  op- 
posed by  the  men,  and  by  some  well-meaning  reformers,  on  the 
ground  that  it  takes  the  bread  away  from  some  one  else  —  a  phase 
of  the  pervasive  fallacious  notion  that  the  community  is  worse  off 
if  its  labor  force  is  utilized  to  the  utmost. ^  What  is  true  of  women 
awaiting  marriage  is  even  more  true  of  women  who  do  not  marry 
at  all;  their  own  happiness  as  well  as  their  usefulness  in  society  is 
1  See  below,  Chapter  52,  §  3. 


152  THE  DISTRIBUTION  OF  WEALTH  [47-§9 

immensely  promoted  if  they  have  stated  work,  paid  for  at  its 
market  value. 

But  women's  work,  and  especially  the  work  of  young  un- 
married women,  must  be  safeguarded  in  such  a  way  as  to  con- 
serve health  and  character.  There  should  be  stringent  regula- 
tion as  to  the  permissible  age,  the  hours  of  work,  ventilation  and 
sanitation  in  workshops.  No  utilization  of  productive  forces~can 
be  more  wasteful  than  that  which  impairs  the  moral  or  bodily 
soundness  of  future  mothers.  The  circumstance  that  they  are 
usually  poor  bargainers  —  partly  for  the  very  reason  that  they  are 
at  their  tasks  temporarily  —  renders  them  liable  to  exploitation 
and  makes  legislative  regulation  of  their  labor  the  more  imperative. 

The  employment  of  married  women  or  widows,  having  minor 
children,  is  almost  always  bad.  What  it  adds  to  social  income  is 
much  more  than  offset  by  the  social  loss  from  unkempt  homes  and 
from  lack  of  care  for  the  young.  It  must  be  regarded,  where 
necessary,  as  one  of  the  harsh  necessities  of  an  individualistic  so- 
ciety. Some  charitable  organizations  have  adopted  the  policj^  of 
deliberately  paying  penniless  widows,  not  for  work  outside  the 
home  but  for  staying  at  home  and  caring  properly  for  their  fami- 
lies. It  has  been  under  consideration  in  Germany  that  the  great 
system  of  workmen's  insurance,  which  now  provides  for  the  con- 
tingencies of  sickness,  accident,  infirmity,  and  old  age,^  shall  be 
extended  to  provide  for  widowhood  also.  Thru  some  such  meas- 
ure there  may  be  found  a  way  of  mitigating  this  bitter  hardship. 

1  See  below,  Chapter  60. 


CHAPTER  48 
Wages  and  Value 

Section  1.  "Expenses  of  production"  and  "cost  of  production"  again  con- 
sidered. If  there  were  perfect  freedom  of  choice  among  laborers,  value 
would  be  governed  by  cost,  153  —  Sec.  2.  There  being  non-competing 
groups,  demand  (marginal  utility)  governs  relative  wages.  How  this 
principle  applies  to  a  grade  or  group;  marginal  indispensability,  155  — 
Sec.  3.  Qualifications:  earnings  may  be  so  divergent  as  to  cause  seepage 
from  one  group  into  another;  the  standard  of  living  may  affect  numbers 
within  a  group,  158  —  Sec.  4.  The  lines  of  social  stratification  are  stable; 
hence  changes  from  the  existing  adjustments  of  value  are  not  usually 
affected  by  them,  159  —  Sec.  5.  The  theory  of  international  trade 
brought  into  harmony  with  the  theory  of  value  under  non-competing 
groups,  161  —  Sec.  6.  Analogies  between  international  trade  and  do- 
mestic trade,  162. 

§  1.  In  the  present  chapter  we  return  to  the  theory  of  value 
and  its  connection  with  the  theory  of  distribution.  So  close  is 
that  connection  that  the  two  subjects  might  be  properly  treated 
as  one.  It  is  chiefly  for  convenience  and  clearness  in  exposition 
that  they  have  been  separated  in  this  book. 

Let  the  reader  recall  the  distinction  indicated  by  the  phrases 
"cost  of  production"  and  "expenses  of  production."  i  By  ex- 
penses of  production  we  mean  the  outlays  that  must  be  made  to 
bring  a  commodity  to  market  —  what  must  be  paid  for  wages, 
materials,  and  the  like.  Since  the  materials  themselves  are  made 
by  labor,  and  the  outlays  of  capitalists  are  resolvable  into  a  suc- 
cession of  advances  to  laborers,  the  main  expenses  of  production 
in  the  end  are  simply  wages.2  By  cost  of  production  we  mean 
efforts  and  sacrifices  —  mainly  labor.  The  distinction  between 
expenses  and  cost  —  between  wages  and  labor  —  is  an  obvious 
one  and  an  important  one,  tho  unfortunately  not  indicated  by  any 

1  See,  especially,  Chapter  12,  §  1. 

2  Compare  Chapter  5,  §  5;  and  Chapter  38,  }  4. 

153 


154  THE  DISTRIBUTION  OF  WEALTH  [48-§  1 

well-established  phraseology.  In  everyday  language  people  mean 
by  "cost"  employer's  outlays;  and  this  current  usage  was  accepted 
in  most  of  what  has  preceded.  In  what  is  to  follow,  it  will  be 
helpful  to  keep  these  two  notions  distinct,  and  "cost"  will  be 
used  in  the  sense  of  labor  or  effort. 

If  competition  between  laborers  were  perfectly  free  —  if  there 
were  no  non-competing  groups  —  expenses  of  production,  so  far 
as  they  consisted  of  wages,  would  perfectly  measure  cost  or  effort. 
There  could  then  be  no  differences  of  wages,  except  such  as  served 
to  equalize  the  attractiveness  of  different  employments.  Higher 
wages  in  any  one  occupation  would  then  signify  that  the  work  in 
it  was  harder,  more  disagreeable,  in  less  esteem;  in  other  words, 
that  it  involved  greater  effort  or  irksomeness,  that  is,  greater  cost. 

Under  such  a  supposition,  it  would  be  possible  to  maintain  a 
labor  theory  of  value:  that  the  value  of  commodities  measured  or 
embodied  the  labor  given  to  producing  them.  Higher  value  would 
be  the  result  of  more  outlay  in  wages,  and  more  outlay  in  wages 
would  mean  either  more  labor  or  labor  of  a  more  irksome  kind; 
that  is,  higher  cost.  This  conclusion  would  assume  also,  to  be 
sure,  that  competition  among  capitalists  was  free,  and  that  all 
capitalists'  outlays  in  the  way  of  wages  were  weighted,  or  added  to, 
in  the  same  proportion,  in  order  to  yield  a  return  on  these  outlays 
in  the  form  of  interest.  As  this  weighting,  or  addition  for  interest, 
would  affect  all  commodities  equally,  value  would  remain  undis- 
turbed; since  value  is  only  the  expression  of  a  relation.  If  ten 
per  cent  for  interest  were  added  to  the  wage  bill  for  each  and  every 
commodity,  no  one  commodity  would  be  affected  more  than  any 
other,  and  each  would  exchange  for  the  same  quantity  of  any  other 
as  before.!  For  the  validity  of  this  conclusion,  it  must  further  be 
assumed  that  temporary  fluctuations,  or  "market  values,"  may  be 
disregarded.  With  free  competition  both  of  labor  and  of  capital, 
supply  would  be  so  adjusted  in  the  end  that  no  one  set  of  laborers 
or  capitalists  would  secure  higher  rewards  than  any  other  set. 

1  The  reader  conversant  with  the  history  of  economic  theory  need  not  be  re- 
minded of  the  qualification  of  this  proposition  which  was  so  much  dwelt  on  by 
Ricardo  and  his  followers.  See  Ricardo,  Political  Economy,  Chapter  I ;  J.  S.  Mill, 
Political  Economy,  Book  III,  Chapter  IV. 


48-§2]  WAGES  AND  VALUE  155 

Supply  being  so  adjusted,  value  would  be  regulated  fundamentally 
by  quantity  of  labor,  that  is,  by  cost  in  the  sense  of  labor  exerted. 

§  2.  In  fact,  however,  as  we  have  seen,  the  movement  of  labor 
is  not  free.  Looking  to  this  circumstance  alone,  and  disregarding 
for  the  moment  the  same  possibility  as  to  capital  —  that  is,  as- 
suming capital  to  compete  freely  —  let  us  consider  how  value 
would  be  adjusted.  Suppose  a  non-competing  group  of  workmen 
which  comprises  a  single  trade,  say  glass  blowers;  what  will  de- 
termine the  value  of  the  commodities  made  by  them? 

The  answer  is  simple:  marginal  utility  or  marginal  vendibility; 
the  reader  will  bear  in  mind  the  distinctions  and  qualifications 
suggested  by  this  turn  of  phrase.^  That  will  determine  both  the 
wages  of  the  glass  blowers  and  the  selling  price  of  the  window, 
glass  and  other  articTes'made  by  them.  The  quantity  of  such 
articles  put  on  the  market  will  be  limited  by  the  number  of  work- 
men in  this  group.  AsTKe  capitalists  (by  supposition)  compete 
among  themselves,  they  bid  for  the  services  of  this  particular  group 
of  laborers  until  nothing  is  left  to  themselves  but  normal  profits  and 
interest.  A  current  high  rate  of  wages  for  such  laborers  will  estab- 
lish itself.  Every  capitalist  will  regard  his  outlay  for  such  wages 
as  part  of  his  "cost";  that  is,  of  what  we  here  call  the  "expenses" 
of  production.  The  selling  price  of  his  wares  seems  to  him  to  be 
based  on  what  he  has  to  pay  to  his  workmen.  People  are  con- 
stantly saying  that  they  are  "compelled  "  to  pay  the  ruling  rate  of 
wages  or  the  ruling  price  for  an  article,  forgetting  that  one  of  the 
things  that  establishes  the  ruling  prices  or  ruling  wages  is  their 
own  willingness  to  pay  rather  than  go  without.  It  is  the  bid- 
ding of  the  capitalists  for  workmen  that  causes  the  high  rate  of 
wages;  but  that  bidding  rests  on  the  high  prices  which  buyers  pay 
for  the  wares  —  that  is,  on  the  desirability  of  the  wares  to  them. 
Not  quantity  of  labor,  but  utility,  then  would  govern  value:  not 
the  conditions  of  supply,  but  those  of  demand. 

This  simple  case  gives  the  key  to  the  phenomena  of  value  under 
the  conditions  of  non-competing  groups.  But  before  It  can  be  ap- 
plied, sundry  qualifications  and  amplifications  must  be  considered. 

1  See  Chapter  9,  §  4. 


156  THE  DISTRIBUTION  OF  WEALTH  [48-§2 

In  the  first  place,  it  is  rare  that  the  workmen  in  any  single  trade 
are  able  permanently  to  shut  out  competition.  The  case  of  glass 
blowers  has  been  adduced,  by  way  of  illustration,  because  it  ap- 
proached that  possibility.  Glass  blowing  long  was  one  of  the  few 
trades  which  preserved  down  to  the  most  recent  time  the  charac- 
teristics of  a  highly  specialized  handicraft.  In  general,  workmen 
are  partitioned  into  groups,  not  trades.  There  may  indeed  be  tem- 
porary variations  of  wages,  and  these  of  a  considerable  sort,  because 
of  sudden  changes  in  the  demand  for  one  or  another  kind  of  labor. 
Activity  in  the  iron  industry,  for  example,  or  in  building  opera- 
tions, may  cause  unusually  high  wages  for  the  needed  mechanics. 
Such  variations  endure  longer  than  economists  have  been  apt  to 
suppose;  and  the  workmen  themselves,  as  well  as  their  employers, 
often  speak  and  act  as  if  they  would  last  indefinitely.  In  fact,  un- 
usually high  wages  of  this  sort  attract  other  workmen  from  the 
same  group  in  society,  and  so  set  in  motion  forces  that  bring  them 
down  to  the  level  common  for  the  group.  Wages  tend  to  be  ad- 
justed roughly  to  the  same  level  for  all  workmen  in  any  one  social 
and  economic  layer. 

The  influence  of  demand  in  determining  the  range  of  wages  in 
any  one  large  group  is  far  from  simple.  Labor  of  almost  any  kind 
has  a  derived  utility.  The  glass  blower's  labor  has  a  utility  derived 
from  that  of  the  glass  he  makes;  that  of  the  ironworker  a  utility 
derived  from  that  of  the  crude  or  finished  iron.  But  it  is  an  arti- 
ficial simplification  of  industry  to  think  of  the  glassware  or  iron  as 
made  by  the  glass  workers  or  ironworkers  alone.  The  iron,  for 
example,  is  made,  not  by  the  puddlers  or  rollers  only,  but  by  them 
in  combination  with  the  miners  who  dug  the  ore,  the  railway  work- 
ers who  helped  to  carry  it,  the  common  laborers  who  are  employed 
in  each  of  the  stages  —  not  to  mention  the  managers,  foremen, 
trained  engineers.  Only  in  comparatively  rare  cases  —  as  with 
the  services  of  physicians  or  domestic  servants  —  do  the  workers 
supply  single-handed  the  utilities  on  which  their  pay  rests.  Or- 
dinarily, workmen  of  different  kinds  and  grades  combine  to  make  a 
commodity.  All  are  equally  indispensable;  utility  and  marginal 
utility  are  attributes  of  the  commodity  as  such:  how  say  whether 


48-§2]  WAGES  AND  VALUE  157 

the  skilled  mechanic  or  the  common  laborer  has  the  greater  share 
in  yielding  the  utility? 

The  principle  of  marginal  utility  is  here  applicable  under  the 
guise  of  marginal  efficiency  or  marginal  indispensability.  Common 
unskilled  labor,  for  example,  is  cheap  because  there  is  plenty 
of  it.  If  there  were  very  little  of  it,  it  would  be  in  the  high- 
est degree  indispensable  and  would  be  paid  for  at  a  corresponding 
rate.  Being  plentiful,  it  is  applied  not  only  to  operations  that  are 
indispensable,  but  to  others  that  are  less  and  less  vital,  until 
finally  its  marginal  application  is  reached  at  the  point  where  it  is 
least  needed.  While  in  some  directions  it  adds  enormously  to 
the  output,  or  to  the  joint  productivity  of  all  the  labor  with 
which  it  is  combined,  in  others  it  adds  less.  It  is  its  marginal 
effectiveness  that  determines  the  pay  which  the  whole  must  accept. 
So  it  is  with  skilled  labor.  In  some  directions  it  is  in  the  highest 
degree  important;  the  loss,  were  it  taken  away,  would  be  very 
great.  It  is  the  loss,  or  diminution  in  output,  which  would  en- 
sue if  the  last  installment  of  it  were  taken  away,  that  determines 
the  remuneration  of  any  one  kind  of  labor. 

The  principle,  it  is  obvious,  is  essentially  the  same  as  that  applied 
to  capital :  ^  the  contribution  or  addition  which  the  marginal  in- 
stallment of  capital  makes  to  the  output  determines  the  return  on 
all  capital.  Similarly,  the  marginal  contribution  from  any  grade 
or  group  of  labor  determines  the  remuneration  of  all  within  that 
grade.  Both  for  capital  and  for  groups  of  laborers  this  principle 
works  out  its  results  by  a  slow-moving  but  persistent  and  powerful 
process.  The  market  variations  of  wages,  the  struggles  and  de- 
bates of  the  day,  seem  to  be  carried  on  quite  without  regard  to  it. 
But  the  "fair"  wages  to  which  appeal  is  constantly  made  in  cur- 
rent contentions  are  in  reality  the  wages  which  this  slow-moving 
process  tends  to  bring  about. 

The  ultimate  determinant  of  value,  then,  where  there  a  re  non- 
competing  groups,  is  marginal  utility,  not  cost  in  the  sense  of  labor 
or  effort.  Between  the  members  of  any  one  group,  it  is  true,  ex- 
changes are  conducted,  and  remuneration  is  determined,  on  the 

1  See  Chapter  38,  §  5. 


158  THE  DISTRIBUTION  OF  WEALTH  [48-§3 

basis  of  cost.  Skilled  workmen  in  buying  one  another's  products, 
and  lawyers  and  physicians  in  buying  one  another's  services,  ex- 
change in  proportion  to  labor  exerted,  and  earnings  within  each 
group  are  determined  by  an  equalization  of  effort.  Between  groups, 
however,  this  is  not  the  case.  The  range  of  pay  in  the  "  liberal "  pro- 
fessions and  in  the  occupations  of  the  well-to-do  generally,  is  high 
because  their  members  are  limited  in  number  compared  to  the 
manual  laborers,  and  the  marginal  efficiency  of  their  services  is 
therefore  high.  So  it  is  as  to  mechanics  and  skilled  workmen  of  all 
sorts:  their  scarcity,  relatively  to  the  demand  for  their  services, 
gives  them  an  advantageous  position  and  a  comparatively  high 
remuneration.  Expenses  of  production,  or  outlays  paid  to  secure 
labor,  are  thus  the  results  of  value  rather  than  the  causes  of  value. 
§  3.  Some  qualifications  to  this  conclusion  must  be  noted,  in 
another  direction.  The  remuneration  of  a  group  may  be  so  high 
as  to  attract  laborersTrom  another  group.  The  barriers  betw^een 
groups  are  not  impassable,  and  with  the  progress  of  society  they 
tend  to  become  less  and  less  so.  The  greater  the  difference  in  re- 
muneration, the  greater  the  inducement  to  get  over  the  barriers, 
and  the  more  likely  a  movement  of  some  laborers  —  the  alert  and 
ambitious  —  into  the  higher  ranks.  So  far  as  the  obstacles  to 
movement  are  the  result  of  environment  and  nurture,  the  differ- 
ences between  non-competing  groups  are  thus  subject  to  a  check. 
So  far  as  differences  in  inborn  gifts  underlie  them  (an  uncertain 
matter,  as  we  have  seen),  no  such  check  can  be  in  operation. 

But  even  within  a  group  numbers  may  increase,  thru  the  growth 
of  population.  We  may  conceive  that  a  high  rate  of  pay  among, 
say,  skilled  laborers  would  lead  to  early  marriages,  more  births, 
and  so  eventually  to  an  increased  supply  of  such  laborers.  Con- 
versely, we  may  conceive  that  if  the  rewards  in  a  given  group  — 
say  in  the  liberal  professions  —  were  low,  marriages  would  be  de- 
layed, births  diminished,  and  the  supply  of  such  labor  lessened. 
Movements  of  this  sort  would  depend  on  the  standard  ofJ[iying 
jsdthin  the  group.  A  standard  of  living  so  tenaciously  held  as  to 
affect  natural  increase  may  be  a  force  in  the  background,  fixing  a 
sort  of  supply  price  and  in  the  end  affecting  relative  wages  more 


48-§4]  WAGES  AND  VALUE  159 

fundamentally  than  marginal  efficiency.  There  is  evidence  that 
a  force  of  this  sort  acts  on  the  nmnbers  of  the  well-to-do  in  modern 
countries,  and  aids  in  keeping  them  in  their  favored  position;  and 
there  is  evidence,  too,  that  the  same  force  is  coming  into  operation 
in  the  upper  tier  of  manual  workers.  But  on  this  topic,  and  on  the 
mode  in  which  wages  are  affected  by  the  increase  of  numbers  and 
the  standard  of  living,  more  will  be  said  later. ^ 

§  4.  In  the  first  volume  of  this  book,2  value  was  treated  as  if 
dependent  on  expenses  of  production,  or  on  cost  in  the  ordinary 
commercial  sense.  It  has  been  pointed  out  that  the  treatment  is 
inadequate.  These  very  expenses,  being  mainly  resolvable  into 
wages,  depend  on  the  play  of  value.  Nevertheless,  the  general 
principles,  as  they  were  stated  before,  are  not  so  profoundly  modi- 
fied by  the  theory  of  non-competing  groups  as  at  first  may  seem  to 
be  the  case.  It  still  remains  true  that  varying  exp>enses  of  pro- 
duction are  the  causes  of  most  changes  in  value. 

WTien  once  the  broad  lines  of  social  classification  are  estab- 
lished, and  the  earnings  of  different  groups  adjusted  to  their  num- 
bers and  their  marginal  efficiency,  relative  wages  become  compar- 
atively stable.  As  Ricardo  said,  "the  scale,  when  once  formed,  is 
liable  to  little  variation.  "^  Changes  in  demaJid__cajise_JahjQr_ta- 
shift  from  one  occupation  to  another  withm  each  grade,  but  rarely 
cause^TTolTceable  change  in  the  demand  for  all  the  laborers  in  the 
grade.  Hence  variations  in  expenses  of  production  and  variations 
in  cost  of  production  ordinarily  run  together^  The  employer  is 
"right  in  thinking  that  the  wages  he  must  pay  to  the  unskilled,  to 
mechanics,  to  trained  engineers,  are  settled  once  for  all  by  forces 
with  which  he  has  nothing  to  do.  The  forces  determining  them  are 
so  broad  and  pervasive  that  his  particular  demand,  tho  it  forms 
part  of  the  whole  demand  acting  on  each  group,  is  lost  in  the  total. 

Only  long-continued  a*nd  far-reaching  changes  in  demand  affect 
the  relations  between  non-competing  groups;  and  only  then  do  ex- 
l>enses  of  production  (that  is,  relative  wages)  appear  as  results, 

1  Compare  Chapters  53  and  54,  on  Population. 

2  Chapters  12,  13,  14. 

»  Ricardo's  Works,  p.  15. 


160  THE  DISTRIBUTION  OF  WEALTH  [48-§4 

not  causes,  of  changes  in  value.  If,  for  example,  the  arts  of  pro- 
duction should  be  so  modified  that  common  labor  would  need  to  be 
applied  less  and  less;  if  machinery  were  so  perfected  that  ordinary 
delving  and  hewing  were  done  by  intricate  apparatus  made  and 
guided  by  skilled  mechanics  —  the  relative  situation  of  these  two 
groups  would  be  changed.  Unskilled  laborers  would  be  less 
needed,  and  if  their  numbers  were  the  same,  the  marginal  eflSciency 
of  their  labor  would  be  less.  The  converse  would  happen  as  to 
skilled  laborers :  they  would  be  more  in  demand,  and  the  marginal 
utility  of  their  labor  would  be  greater.  Possibly  some  such  change 
is  slowly  taking  place  in  the  countries  of  advanced  civilization. 
Common  labor,  it  is  true,  can  never  be  dispensed  with ;  but  in  many 
directions  the  need  for  it  seems  to  be  becoming  less.^  If  wages  for 
this  group  are  to  rise,  it  must  be  chiefly  by  a  decrease  of  supply 
rather  than  by  an  increase  of  demand;  by  that  process  of  escape 
into  other  and  better-paid  groups  which  is  the  natural  result  of 
universal  education  and  democratic  freedom. 

To  repeat,  such  shifts  in  the  economic  relations  of  the  social 
groups  take  place  so  slowly  that  they  may  almost  be  disregarded. 
Possibly  the  time  will  coms  when  the  social  stratification  of  our 
time  will  have  been  obliterated;  when  all  sorts  of  work  will  be  re- 
warded in  proportion  to  the  sacrifices  involved ;  when  all  sorts  will 
be  in  equal  esteem ;  when  the  common  laborer  and  his  children  will 
have  the  same  opportunities  for  education  and  advancement  as 
the  mechanic  and  the  lawyer.  Then  expenses  of  production  or 
relative  wages  will  have  very  different  aspects  from  what  they  have 
now.  Tho  real  differences  in  wages  may  still  persist;  because  of 
the  inborn  differences  of  men,  they  can  hardly  fail  to  be  much  less 
pronounced  than  they  now  are.  Under  existing  social  conditions, 
however,  such  possibilities  may  be  disregarded.  Variations  in  re- 
ward are  the  stable  results  of  the  generally  constant  demand  for 
the  different  kinds  of  labor.  Changes  in  value  are  commonly  due 
-tQ^hanges  in  the  quantities  of  Jhejiifferent,idndajQf..liL 

1  The  demand  for  unskilled  labor  seems  to  be  greatest  when  plant  and  machinery 
are  being  constructed.  Once  the  railways,  canals,  factories,  are  in  operation,  the 
demand  is  more  largely  for  a  grade  of  labor  above  that  level. 


48-§  5]  WAGES  AND  VALUE  161 

for,  that  is,  to  changes  in  cost;  tho  the  general  scale  of  values  is  the 
result  of  demand  and  utility,  not  of  labor  applied. 

§  5,  Similar  reasoning  is  applicable  also  to  the  theory  of  inter- 
national trade.  That  theory,  as  it  was  stated  in  the  preceding 
Book  on  international  trade,  rested  mainly  onjijabor  theory  of 
value.^  It_assumgd_that~^ose  things-were  cheap  in  a  given  coun- 
try, and  hence  likely  to  be  exported  froi»-that~eountry>  which 
were  produced  with  comparati^•ely  little  labor;  while  those  were 
dear,  and  were  likely  to  be  imported,  which  were  produced  with 
comparatively  much  labor.  At  first  sight,  it  seems  that  all  these 
conclusions  fail  if  we  adopt  the  principle  of  non-competing  groups 
and  of  marginal  utility  as  the  ultimate  determinants  of  value. 
Things  are  cheap,  and  likely  to  be  exported,  not  simply  because 
their  cost  in  labor  is  low,  but  because  of  the  complex  social  con- 
ditions that  determine  within  a  country  relative  wages  and  rela- 
tive prices.  Yet  the  correction  called  for  in  the  theory  of  inter- 
national trade  is,  after  all,  not  far-reaching. 

The  correction  would  be  vital  if  the  phenomena  of  social 
stratification  were  very  different  in  different  countries.  Then  it 
might  happen  that  one  kind  of  labor  —  say  skilled  mechanics'  — 
was  cheap  in  one  country  and  dear  in  another;  whence  it  would 
follow  that  the  former  country  would  export  the  products  of  such 
labor.  If  another  kind  of  labor  —  say  routine  factory  labor  — 
were  cheap  in  the  second  country,  this  country  in  turn  would  ex- 
port the  products  of  that  labor.  But  in  fact  the  phenomena  of 
social  stratification  are  not  widely  divergent.  Non-competing 
groups  on  the  whole  are  arranged  in  the  same  series  of  grades  in 
different  countries.  Such  at  least  is  the  case  in  the  countries  of 
advanced  civilization;  they  show  essentially  the  same  cleavage 
between  the  soft-handed  and  the  hard-handed  classes,  the  same 
steps  from  skilled  mechanic  down  to  common  labor.  Hence,  as 
between  the  civilized  countries,  the  broad  social  demarcations  are 
more  important  within  their  own  borders  than  in  the  exchanges 
with  each  other.  The  international  exchanges  still  rest  mainly 
on  comparative  efficiency  of  labor.  True,  it  will  happen  more 
1  See  especially  Chapters  34  and  35. 


162  THE  DISTRIBUTION  OF  WEALTH  [48-§6 

frequently  than  the  older  economists  thought  that  peculiar  vari- 
ations in  wages  —  wages  in  some  one  grade  or  occupation  lower 
in  one  country  than  in  another  —  will  explain  the  exportation  of 
a  particular  commodity.  The  so-called  parasitic  industries  of 
Germany  and  England  supply  illustrations.  Certain  sorts  of 
educated  labor,  again,  are  comparatively  cheap  and  plentiful  in 
Germany;  such  is  the  situation  with  German  compositors  trained 
to  set  up  books  in  the  ancient  languages,  and  with  German  makers 
of  some  musical  instruments.  But  these  are  not  the  ruling  or  typi- 
cal cases.  The  main  currents  of  international  trade  are  still 
determined,  between  the  civilized  countries  at  least,  by  the  com- 
parative efficiency  of  labor  in  producing  the  imported  and  ex- 
ported commodities. 

§  6.  The  exchanges  between  different  countries  are  analogous 
to  the  exchanges  between  non-competing  groups  within  a  coun- 
try; and  the  resemblances  illustrate  the  play  of  the  value-deter- 
mining forces  so  well  that  they  deserve  some  fuller  consideration, 
even  tho  at  the  expense  of  prolonging  still  further  the  present 
digression  from  the  subject  in  hand  —  distribution. 
/ ^^  As  between  nations,  so  between  social  groups,  the  range  of 
t^    money  incomes  is  the  instrument  and  the  decisive  test  of  gain; 

/and  that  gain  is  realized  in  the  purchase  of  the  things  _^pr  services 
provided  by  other  groups.     An  American  or  Englishman  secures 
the  greatest  advantage  of  international  trade  when  he  buys  tea, 
coffee,  spices  —  that  is,  things  made  by  low-wage  labor  in  tropi- 
cal countries.     Similarly,  the  lawyer  or  business  man  secures  his 
greatest  gains  from  the  exchanges  between  social  groups  when  he 
buys  things  made,  or  services  provided,  by  those  who  are  in  the 
lower  groups.     His  money  income  goes  far  in  the  purchase  of  the 
services  of  domestics  —  of   choremen   and    chorewomen,    maid- 
^         servants,  grooms,  and  coachmen.    But  it  is  of  no  special  advantage 
"^     in  paying  the  bills  of  physicians  "ancfTIentists:    these  are  in  the 
same  group  with  himself  and  their  services  must  be  paid  for  at 
the  higher  rate  there  prevalent.     If  the  labor  of  the  physicians 
/'       and  dentists  were  peculiarly  efficient,  their  services  would  be  cheap, 
f/ ,       while  yet  their  incomes  would  be  high  in  accordance  with  the 


y 


48-§6I  WAGES  AND  VALUE  163 

standards  of  their  social  group.  Not  being  eflBcient  in  any  unusual 
degree,  their  services  are  dear;  precisely  as,  in  any  country  of  high 
money  incomes,  those  domestic  commodities  are  dear  in  which 
there  is  not  special  efficiency  of  labor. 

The  analogy  between  nations  and  non-competing  groups  may 
be  carried  further.  The  rates  of  exchange  in  both  cases  are 
^settled  by  broad_causes,  acting  slowly  and  little  liable  to  disturb- 
ance except  (n-er  long  periods  of  time;  and  hence  they  are  assumed 
by  most  persons,  and  indeed  by  most  economists,  as  matters  of 
course.  That  money  incomes  should  be  comparatively  high  in 
the  United  States  and  England  and  France  and  Germany,  is  com- 
monly accepted  as  part  of  the  order  of  nature.  The  fact  that  the 
money  incomes  of  physicians  and  lawyers  and  the  upper  tier  of 
business  men  are  comparatively  high  is  accepted  in  the  same  un- 
questioning way,  because  of  the  familiarity  and  the  permanence 
of  the  differences.  In  both  cases  the  differences  are  due,  none 
the  less,  to  causes  which  are  to  be  found  proximately  in  the  con- 
ditions of  demand  between  groups  and  between  nations.  Lying 
back  of  these  canditions  of  demand  may  perhaps  be  found  deeper 
^^^earfses  —  inborn  and  ineffaceable  differences  in  intelligence  and 
character.  We  have  seen  how  difficult  it  is,  as  between  social 
groups,  to  decide  whether  acquired  or  inborn  traits  determine  the 
lines  of  social  divisions.  So  between  nations  it  is  not  easy  to  say 
whether  the  advantages  which  one  country  may  possess  are  due  to 
unalterable  racial  qualities  or  to  the  accidents  of  historical  devel- 
opment and  acquired  skill.  PrQhably_the  racial  causes  tell  more 
in  settling  the  differences  and  the  resulting"exchariges~15etween1a 
civilized  nation  and  a  barbarous  or  semi-civilized;  whereas  be- 
tween the  civilized  nations  themselves  acquired  traits  are  of  more 
importance.  However  this  may  be,  the  differences  exist,  and  not 
only  exist  but  maintain  themselves  thru  generations  and  cen- 
turies; as  do  those  between  social  groups  within  a  country.  At 
any  given  time,  and  for  considerable  periods,  they  must  be  ac- 
cepted as  settled  facts  and  thus  as  causes,  not  analj^zed  as  results. 


CHAPTER  49 
Business  Profits 

Section  1.  Business  profits  rest  on  the  assumption  of  risks.  The  term  "prof- 
its," 164  —  Sec.  2.  Position  of  the  business  man  as  receiver  of  a  residual 
income.  Irregularity  and  wide  range  of  this  income,  its  relation  to  prices. 
Tho  irregular,  it  is  not  due  to  chance,  166  —  Sec.  3.  The  part  played  by 
inborn  ability;  that  played  by  opportunity,  environment,  training,  169  — 
Sec.  4.  The  qualities  requisite  for  success:  imagination,  judgment, 
courage.  Mechanical  talent  not  so  important  as  might  be  expected. 
Relations  of  the  business  man  to  inventors.  Diversity  of  qualities  among 
the  successful,  170  —  Sec.  5.  A  process  of  natural  selection  among  busi- 
ness men.  Natural  capacity  tells  more  than  in  most  occupations,  173  — • 
Sec.  6.  Motives  of  business  activity  and  money-making.  Social  ambi- 
tion the  main  impulse;  other  motives  are  also  at  work,  175  —  Sec.  7. 
What  changes  would  occur  if  business  ability  were  very  plentiful  and 
capacity  for  muscular  labor  very  scarce,  177. 

§  1.  We  return  now  to  the  main  course  of  the  argument,  re- 
suming the  subject  of  distribution.  Business  profits  present  many 
of  the  problems  presented  by  differences  of  wages,  and  are  best  ^, 
regarded  as  simply  a  form  of  wages.  Yet  they  have  many  peculiar- 
ities and  call  for  separate  consideration.  Various  phrases  have 
been  used  to  designate  this  share  in  distribution :  "  wages  of  man- 
agement," "net  profits,"  "business  earnings,"  the  reward  of  the 
"entrepreneur"  or  "undertaker"  or  "enterpriser."  "Business 
profits"  indicates  the  sort  of  income  now  to  be  considered,  and 
"business  man"  similarly  indicates  what  kind  of  person  secures  it. 

In  common  speech,  "profits"  and  "business  profits"  are  usually 
stated  in  terms  of  a  percentage  on  the  capital  employed.  A  man 
is  said  to  make  profits  of  ten  per  cent  or  twenty  per  cent  on  his 
capital.  If  part  of  the  capital  is  borrowed  and  stipulated  inter- 
est is  paid  to  a  creditor,  the  amounts  so  paid  are  deducted  from 
the  gross  profits.  No  such  deduction  is  commonly  made,  how- 
ever, for  interest  on  that  capital  which  is  put  in  by  the  business 
man  himself,  not  borrowed.    Yet  if  interest  be  regarded  as  the 

164 


49-§l]  BUSINESS  PROFITS  165 

mere  return  on  capital,  and  business  profits  as  earnings  which  are 
essentially  wages,  the  deduction  should  be  made  in  the  second  case 
as  well  as  in  the  first.  The  capital  invested  by  a  business  man 
and  managed  by  himself  would  secure  the  current  rate  of  inter- 
est if  lent  to  someone  else  and  managed  by  someone  else.  Only 
that  amount  which  is  over  and  above  interest  on  the  owner's 
capital  should  be  regarded  strictly  as  business  profits. 

The  essential  distinction  between  interest  and  business  profits 
is  recognized  in  everyday  discussion  quite  as  often  as  it  is  ignored. 
It  would  be  admitted  by  all,  as  a  matter  of  course,  that  there  is  a 
difference  as  regards  the  reasonableness  or  probability  of  a  given 
rate  of  return.  If  the  rate  of  interest  is  six  per  cent,  the  rate  of 
profits,  it  is  agreed,  ought  to  be  higher;  and  it  is  expected  that  in 
fact  it  will  be  higher.  The  reasoning  of  the  street  and  that  of  the 
economist  would  be  more  easily  brought  into  accord  if  business 
profits  were  usually  spoken  of,  not  as  a  percentage,  but  as  a  lump 
sum,  a  total  accruing  each  year  or  each  six  months,  like  the  in- 
come of  an  architect  or  lawyer  or  physician.  But  various  causes 
prevent  this  usage;  not  merely  the  tradition  of  older  days,  when 
the  business  man  usually  managed  his  own  capital  and  borrowed 
comparatively  little,  but  other  more  substantial  causes,  such  as 
the  all-pervasive  conduct  of  business  in  the  corporate  form  and, 
not  least,  a  real  connection  between  amount  of  capital  and  the 
gross  sum  of  business  profits.  Of  these  matters  more  will  be  said  as 
we  proceed.  During  the  first  stage  in  the  analysis  it  is  best  to 
draw  a  clear  line  of  distinction  between  the  interest  on  capital  and 
the  business  profits  of  the  manager. 

Everyday  speech  not  only  fails  often  to  distinguish  between 
business  profits  and  interest  but  confounds  with  profits  such  things 
as  rent  and  monopoly  gains.  A  patent  worked  by  its  owner  is 
spoken  of  as  yielding  large  profits.  Royalties  paid  on  a  patent 
or  a  copyrighted  book  are  often  termed  profits.  Similar  language 
is  used  regarding  the  gains  accruing  from  a  valuable  urban  site. 
The  adoption  by  economists  of  the  terms  of  everyday  fife  leads  to 
frequent  misunderstandings,  and  sometimes  to  real  ambiguities; 
for  it  cannot  but  happen  that  the  economist  himself  at  times  will 


166  THE  DISTRIBUTION  OF  WEALTH  [49-§2 

use  words  in  the  vernacular  sense.     He  will  speak  of  high  "  profits," 
for  example,  when  he  has  in  mind  merely  good  fat  returns  of  one 
sort  or  another.     In  the  present  discussion,  and  in  general  thru  this 
book,  "  business  profits  "  will  be  used  in  the  sense  already  indicatedi^- 
namely,  earnings  over  and  above  interest,  over  and  above  rent  pr_ 
monopoly  gains. 

The  independent  conduct  of  industry  is  the  salient  characteristic 
of  the  business  man's  work.  J3e  assumes  thfe  risks  of  the  outcome  of 
industrial  operations;  whereas  the  salaried  person  or  wage  earner 
has  a  definite  amount  promised  him  in  advance  for  settled  duties. 
In  this  respect  it  is  immaterial  whether  the  business  man  conducts 
operations  on  a  large  scale  or  on  a  small.  The  village  cobbler 
and  the  owner  of  the  large-scale  shoe  factory,  the  petty  shop- 
keeper and  the  great  merchant,  the  peasant  proprietor  and  the 
estate  farmer,  alike  are  business  men  and  earn  business  profits. 
The  physician  or  lawyer  who  is  engaged  in  the  independent  prac- 
tise of  his  profession  is,  from  this  point  of  view,  in  the  same  class; 
for  his  position  evidently  differs  in  a  similar  way  from  that  of  the 
physician  or  lawyer  who  is  engaged  at  a  fixed  salary.  But  usually 
we  think  in  connection  with  business  management  chiefly  of  those 
who  conduct  operations  on  a  considerable  scale,  who  manage  sub- 
stantial amounts  of  capital,  who  hire  others  to  work  for  them  and 
under  them,  who  have  to  make  plans  of  some  complexity,  whose 
own  work  is  mainly  or  exclusively  the  direction  of  affairs.  We 
think,  too,  of  the  more  common  industrial  operations  in  trade  and 
manufactures.  We  shall  best  approach  the  special  problems  of  busi- 
ness profits  by  first  considering  these  familiar  and  typical  cases. 

§  2.  The  business  man  stands  at  the  helm  of  industry  and 
guides  its  operations.  Into  his  hands  first  flow  the  proceeds,  and 
he  distributes  to  others  their  share.  He  pays  to  the  hired  workmen 
their  stipulated  wages.  Similarly,  to  those  who  lend  him  capital 
he  pays  stipulated  interest.  It  is  his  weighing  and  guessing  of  the 
money-making  possibilities  of  different  sites  that  determines  the 
rent  of  urban  land,  and  he  pays  to  landowners  their  rents.  After 
making  these  various  payments  he  retains  in  his  own  hand,  what 
is  left.    His  income  may  therefore  be  described  as ;  Residual,   ) 


49-§2]  BUSINESS  PROFITS  167 

This  position  as  residual  claimant  explains  one  striking  char- 
acteristic of  business  profits  —  the  irregularity  of  the  income.  In 
one  year  the  business  man  may  earn  nothing,  may  even  lose. 
Another  year  he  may  gain  great  sums.  The  variations  from  year 
to  year  of  the  same  individual's  profits  arise  from  the  business 
man's  assumption  of  industrial  risks.  Tho  some  hazards  are  so 
regular,  in  their  occurrence  over  a  large  number  of  cases,  that  they 
can  be  insured  against  (fire  and  loss  at  sea),  most  must  be  borne 
once  for  all  by  the  individual  who  first  assumes  them ;  such  as  those 
from  fluctuations  in  demand,  inventions  and  new  processes,  ups 
and  downs  in  general  prices.  The  net  income  of  the  business  man 
is  inevitably  fluctuating. 

The  business  man  more  especially  feels  the  effects  of  changes  in 
prices.  When  prices  rise,  he  gains  for  a  while;  when  they  fall  he 
loses  for  a  while.  This  is  true  of  changes  in  the  price  of  partic- 
ular commodities,  as  regards  the  business  men  who  have  to  deal 
with  those  commodities;  it  is  true  of  changes  in  general  prices,  for 
business  men  as  a  class.  Hence  many  people  get  the  impression 
that  buying  and  selling,  and  skillful  manipulation  of  prices,  are  of 
the  essence  of  business.  It  has  already  been  pointed  out  ^  in  what 
way  rising  and  falling  prices  affect  the  relations  of  business  men  as 
employers  with  the  laborers  whom  they  employ.  There  is  a  close 
dependence  of  business  profits  on  prices,  the  business  man  being 
the  buffer  for  the  first  effects  of  all  changes  in  the  value  of  money. 
But  this  is  often  a  temporary  relation;  it  affects  the  fluctuations  in 
his  income,  but  does  not  determine  in  the  long  run  its  amount  nor 
indicate  its  source. 

So  great  are  the  risks  of  business  that  many  people,  again,  look 
upon  it  all  as  a  game  of  chance.  Some  wdn,  someTose  -^Tt  Ts'TrnT** 
a  great  lottery.  And  there  are  not  a  few  individuals  who  actually 
enter  on  business  operations  in  this  spirit,  with  as  little  close  cal- 
culation or  careful  management  as  a  gambler  uses.  But  it  requires 
no  refined  observation  to  show  that  success  is  not  entirely  a  matter 
of  luck.  True,  there  are  gains  in  one  vear,  losses  in  another.  Some- 
times  it  even  happens  that  permanent  success  is  won  by  chance. 
1  See  Chapter  22,  §  6. 


168  THE  DISTRIBUTION  OF  WEALTH  [49-§2 

A  turn  in  the  market,  a  new  commodity,  a  new  mine,  may  yield  a 
fortune  —  the  business  man's  goal.  One  who  has  thus  won  a  prize 
may  have  the  good  sense  to  stop,  and  to  withdraw  with  his  winnings 
from  the  uncertain  arena.  But  usually  he  tries  again  and  still  again. 
Then  over  a  series  of  years  it  appears  that  some  individuals  show  a 
steady  balance  of  gains,  while  others  in  the  end  lose  and  disappear 
from  active  business.  The  elements  of  success  are  various  — 
shrewdness  in  meeting  risks  as  well  as  skill  and  ability  in  organiza- 
tion. But  continued  success  is  not  due  to  chance.  It  is  due  to  the 
possession  by  some  individuals  of  qualities  not  possessed  by  others. 

Again,  these  qualities  are  possessed  in  varying  degree,  or  at  least 
with  very  varying  results,  by  different  individuals.  The  great 
range  of  this  income  is  even  more  striking  than  its  irregularity  for 
any  one  person.  Some  men  seem  to  have  a  golden  touch.  Every- 
thing to  which  they  turn  their  hand  yields  miraculously.  They 
are  the  captains  of  industry,  the  "big  men,"  admired,  feared,  and 
followed  by  their  business  community.  Others,  of  slightly  lower 
degree,  prosper  generouslj^  tho  not  so  miraculously  —  the  select 
class  of  "solid  business  men."  Thence  by  imperceptible  grada- 
tions there  is  a  descent  in  the  industrial  and  social  hierarchy,  until 
we  reach  the  small  tradesman,  who  is  indeed  a  business  man,  but 
whose  income  is  modest  and  whose  position  is  not  very  different 
from  that  of  the  mechanic  or  the  clerk. 

A  wide  range  in  the  earnings  of  individuals  doing  the  same  sort 
of  work  is  a  peculiarity  of  all  intellectual  occupations.  Tho  some 
mechanics  are  more  skillful  and  better  paid  than  others,  the  dif- 
ferences are  not  comparable  to  those  between  lawyers,  physicians, 
artists,  business  men.  This  is  due  to  the  fact  that  the  differences 
between  men  in  intellectual  endowments  are  vastly  greater  than 
the  differences  in  manual  vigor  and  aptitude.  Tho  not  every  man 
can  be  made  by  training  and  practise  a  skilled  mechanic,  very 
great  numbers  can  be  brought  to  the  highest  possible  expertness. 
It  may  be  that  many  more  men  could  be  made  by  training  into 
serviceable  physicians  and  lawyers  and  business  men  than  in  fact 
are  so  made;  but  the  number  who  can  attain  the  highest  possible 
pitch  of  skill  in  these  occupations  is  very  small  indeed. 


4&-§3]  BUSINESS  PROFITS  169 

§3.  _The  differences  in  the  long-run  earnings  of  different  busi-_ 
ness  men  raise  the  same  questions  as  were  considered  with  refer- 
ence to  ordinary  wages.  Are  they  due  to  differences  in  inborn 
abilities?  or  are  they  the  result  of  training  and  environment?  Do 
the  more  prosperous  business  men  spring  from  the  general  non- 
competing  group  of  the  well-to-do,  with  all  the  advantages  of  that 
class?  or  is  their  success  irresi>ective  of  their  start  in  life,  and  due 
mainly  to  natural  endowments? 

Some  familiar  phenomena  point  to  the  explanation  on  the 
ground  of  inborn  differences.  Poor  boys  rise  to  fortune.  In  the 
United  States  the  farming  class  has  been  a  great  nursery  of  fortune 
builders.  On  the  other  hand,  the  sons  of  these  very  captains  of 
industry  commonly  drop  from  the  posts  of  leadership.  Notwith- 
standing all  the  advantages  of  training,  notwithstanding  the  in- 
heritance of  means  and  of  favoring  opportunities,  they  are  apt  to 
resign  the  active  conduct  of  business  to  men  who  again  have  arisen 
from  the  ranks.  Cases  of  this  sort,  to  be  sure,  are  not  always  so 
significant  of  the  non-inheritance  of  business  ability  as  they  seem 
to  be.  The  failure  of  the  rich  man's  sons  to  emulate  his  achieve- 
ments may  be  due  to  lack  of  motive,  not  lack  of  capacity.  The 
spur  of  need  and  of  unsatisfied  social  ambition  is  lacking.  None 
the  less,  there  are  cases  in  plenty  where  those  to  whom  the  manage- 
ment of  an  established  business  is  bequeathed  fail  to  maintain  it 
even  tho  they  try.  Again  and  again  old-established  firms  whose 
founders  have  passed  away  go  to  pieces  under  the  management 
of  the  heirs. 

But  here,  as  with  other  occupations,  there  is  danger  in  fasten- 
ing attention  on  the  conspicuous  phenomena  alone.  Captains  of 
industry  are  doubtless  born.  So  are  great  poets,  musicians,  men 
of  science,  lawyers.  Tho  there  may  be  occasional  suppressed 
geniuses  among  the  poorer  classes,  ability  of  the  highest  order  usu- 
ally works  its  way  to  the  fore.  Talent  and  good  capacity,  on  the 
other  hand,  are  much  less  rare,  and  they  need  to  be  nurtured.  A 
favorable  start  may  bring  success  to  one  man  of  good  ability;  its 
absence  may  prevent  another  no  less  able  from  rising.  Beneath 
the  highest  tier  of  the  extraordinarily  capable  business  men,  there 


170  THE  DISTRIBUTION  OF  WEALTH  [49-§4 

is  a  great  stratum  of  prosperous  and  well-to-do  persons,  to  whom 
the  advantages  of  capital  and  connection  have  been  of  cardinal 
importance. 

,£a£itd^and[,=Sftaiigctipn  —  these  are  the  two  factors  which  may 
make  a  business  career,  whose  absence  may  mar  it.  Every  busi- 
ness man  must  have  the  command  of  means,  his  own  or  borrowed. 
True,  if  he  has  the  highest  abilities,  lack  of  means  will  not  long 
embarrass  him.  His  start  may  be  slow,  but  he  w^ill  soon  have 
savings  of  his  own,  will  borrow  easily,  and  before  long  will  find 
associates  who  are  not  only  willing  but  eager  to  intrust  him  with  all 
the  money  he  wishes.  It  is  otherwise  with  the  man  nearer  the 
average.  If  parents  or  friends  supply  him  with  the  command  of 
capital,  he  has  a  great  advantage  over  the  less  favored  of  the  same 
ability.  So  it  is  with  connection  —  not  merely  acquaintance  and 
relationship,  but  all  the  varied  influences  of  environment.  He  who 
is  born  in  the  well-to-do  classes  is  surrounded  from  the  outset  by 
the  business  atmosphere.  Traditions,  advice,  opportunities,  come 
to  him  spontaneously.  Whatever  abilities  he  has  find  a  favoring 
ground  for  their  development. 

Set  training  doubtless  counts  for  less  in  the  business_carefir 
I  than  in  the  other  occupations  of  the  well-to-do.  Tho  it  is  probable 
that  in  the  future  business  training  will  be  less  haphazard  than  it 
'K  has  been  in  the  past  and  will  be  in  greater  degree  the  object  of  me- 
thodical instruction,  set  teaching  will  never  play  the  part  which  it 
plays  in  the  professions.  The  career  will  be  always  comparatively 
easy  of  access.  The  obstacles  to  be  surmounted  will  be  chiefly 
those  from  lack  of  means  and  from  all  the  vague  but  potent  influ- 
ences of  environment. 

§  4.  The  business  man  of  the  first  order  must  have  imagination 
and  judgment;  he  must  have  courage;  and  he  must  have  adminis- 
trative capacity. 

Imagination  and  judgment  —  these  are  needed  for  the  general- 
ship of  industry.  The  successful  business  man  must  be  able  to 
foresee  possibilities,  to  estimate  with  sagacity  the  outcome  in  the 
future.  Especially  is  this  necessary  in  new  ventures;  and  it  is  in 
new  ventures  that  the  qualities  of  generalship  are  most  called  for 


49-§4]  BUSINESS  PROFITS  171 

and  the  greatest  profits  are  reaped.  Countless  schemes  for 
money-making  are  being  constantly  urged  on  the  business  cQia=.„. 
munity.  Most  are  visionary.  Among  them  the  captain  of  in- 
dustr3rwin  pick  out  those  that  really  have  possibilities,  will  reshape 
and  develop  them,  and  bring  them  eventually  to  success.  Some- 
times he  errs;  there  could  be  no  great  successes  unless  there  were 
occasional  failures;  but  the  right  sort  of  man  has  a  balance  of 
profitable  ventures.  Not  infrequently  those  are  supposed  to  have 
the  requisite  judgment  who  in  fact  do  not  possess  it.  Personality^, 
tells^^but  may  be  deceptive  —  a  vigorous  presence,  incisive 
speech,  kindling  enthusiasm.  Time  and  again  an  individual  with 
such  a  personality  secures  a  hold  and  a  following,  and  is  enabled  to 
embark  on  large  ventures.  Yet  finally  he  comes  to  grief  because  in 
the  end  he  proves  not  to  have  the  saving  quality  of  judgments 

Courage  and  some  degr^ee  of  .yenturespmeues^  are  obviously  es- 
sential to  the  successful  business  man :  so  much  follows  from  that 
assumption  of  risks  which  is  of  the  essence  of  his  doings.  But  cour- 
age and  imagination  and  personality  will  not  avail  in  the  end  un- 
less there  be  sound  judgment. 

Executive  ability  is  probably  less  rare  than  the  combination  of 
judgment  with  imagination-.  But  it  is  by  no  means  common.  It 
calls  on  the  one  hand  for  intelligence  in  organization,  on  the  other 
hand  for  knowledge  of  men.  The  work  must  be  planned  and  the 
right  man  assigned  to  each  sort  of  work.  The  selection  of  efficient 
subordinates  is  of  the  first  importance.  A  vigorous  constitution  — 
vigorous  in  its  capacit}^  to  endure  prolonged  application  and 
severe  nervous  strain  —  is  almost  a  sine  qua  non,  as  it  is  with  the 
military  leader. 

A  business  man  almost  always  has  to  do  with  the  physics  and 
mechanics  of  industry.  Every  director  of  large  enterprises  must 
choose  between  competing  mechanical  devices,  must  watch  the 
course  of  invention,  must  be  in  the  fore  with  improvements.  It 
might  be  supposed,  therefore,  that  men  of  mechanical  talent 
would  become  the  leaders  in  industry.  Yet  this  is  by  no  means 
the  common  case.  Most  frequently  the  inventors,  engineers, 
and  mechanical  experts  are  in  the  employ  of  the  business  man. 


172  THE  DISTRIBUTION  OF  WEALTH  [49-§4 

Occasionally  an  individual  appears  who  has  in  high  degree  both 
the  business  quahties  and  the  inventor's  quahties.  Such  were 
Stephenson  the  Enghsh  engineer,  and  Werner  Siemens  among  Ger- 
mans. Such  also  were  some  of  the  New  England  pioneers  in  the 
textile  manufactures  during  the  first  half  of  the  nineteenth  cen- 
tury: Lowell,  Batchelder,  Bigelow,  and  others.  But  the  union  of 
two  diverse  kinds  of  ability  in  one  person  is  no  more  common  here 
than  in  other  walks  of  life.  LTsually  the  sort  of  judgment,  insight, 
courage,  persistence,  which  are  needed  for  the  development  and 
wide  use  of  improvements  are  not  possessed  by  the  inventor  him- 
self. Watt,  the  inventor  of  the  steam  engine  (or  at  least  its  suc- 
cessful perfector),  needed  the  judgment  and  resource,  as  well  as 
the  capital,  of  his  business  partner,  Boulton.  Ericsson  was  an  in- 
ventive genius  of  the  first  order:  his  screw  propeller  revolution- 
ized marine  transportation,  and  his  Monitor  influenced  to  hardly  a 
less  degree  the  development  of  modern  warships.  But  he  pinned 
his  faith  also  on  the  caloric  ship,  regardless  of  the  fact  that  the 
required  bulk  of  the  machinery  made  it  commercially  impossible. 
Edison  was  rightly  called  a  wizard;  but  he  failed  conspicuously 
in  some  notable  ventures,  such  as  the  utilization  of  magnetic  iron 
ores  and  the  construction  of  standardized  cement  houses.^  In 
selecting  among  the  numberless  projects  constantly  pressed  on  his 
attention,  the  business  man  exercises  one  of  his  most  characteristic 
functions. 

Too  much  stress  must  not  be  laid  on  any  enumeration  of  the 
business  man's  qualities.  All  sorts  and  conditions  of  men  prove 
to  have  the  qualities  needed  for  pecuniary  success,  —  the  cautious 
and  the  daring,  the  sober  and  the  enthusiastic,  the  loquacious  and 
the  taciturn,  those  given  to  detail  and  those  negligent  of  detail. 
The  different  aptitudes  appear  in  every  kind  of  combination. 
Some  heads  of  large  organizations  keep  every  thread  in  their  own 
hands,  and  not  only  plan  the  large  outlines  of  their  ventures,  but 
look  to  every  detail.     Others  intrust  almost  all  administration  to 

1  The  biographies  of  inventors,  such  as  Church's  Life  of  Ericsson  and  Dyer  and 
Martin's  Life  of  Edison,  are  full  of  passages  on  the  vagaries  of  the  tribe.  I  venture 
to  refer  the  reader  to  what  I  have  said  in  the  first  chapter  of  my  own  book  on 
Inventors  and  Money-makers. 


49-§5]  BUSINESS  PROFITS  173 

subordinates,  and  keep  themselves  free  to  think,  plan,  confer. 
There  are  those  who  keep  strictly  to  "their  business"  —  the  par- 
ticular branch  of  industry  in  which  they  have  embarked;  and  again 
there  are  those  who  launch  freely  into  new  and  varied  enterprises. 
No  one  key  opens  the  doors  to  success. 

The  differences  are  equally  striking  in  qualities  not  directly  con- 
nected with  pecuniary  success.  Some  business  men  are  of  intel- 
lectual bent,  others  are  dullards  in  everything  but  business.  Some 
deal  generously  with  their  employees,  others  constantly  scheme 
to  overreach  them.  Some  are  high-minded  and  public-spirited, 
others  mean  and  selfish.  Fifty  years  ago  writers  on  economic  and 
social  questions  were  prone  to  celebrate  the  virtues  of  the  class. 
In  recent  years  "business"  has  come  to  be  in  bad  odor;  it  is  as- 
sociated in  many  minds  with  grasping  monopoly,  mere  manipula- 
tion of  securities,  tyranny  over  laborers.  In  truth,  the  business  i 
man  at  his  best  is  an  admirable  figure  in  our  modern  world,  and  at 
his  worst  is  a  very  ugly  one.  The  variety  among  the  men  who 
prove  to  have  the  money-making  capacity  is  a  standing  cause  of 
wonder. 

§  5.  Among  all  these  different  sorts  of  persons,  a  process  very 
like  natural  selection  is  at  work.  To  predict  who  has  in  him  the 
qualities  for  success  is  much  harder  than  is  prediction  with  regard 
to  most  occupations.  The  aptitudes  and  abilities  which  must  be 
possessed  by  one  who  would  succeed  in  law,  in  medicine,  in  engi- 
neering, in  teaching,  show  themselves  at  a  comparatively  early 
age,  and  a  friendly  observer  can  often  give  good  advice  as  to  the 
choice  of  these  professions.  But  the  qualities  that  make  for  suc- 
cess in  business  management  not  Infrequently  develop  late,  or  at 
least  show  themselves  late  and  only  under  actual  trial.  Surprises 
are  more  common  in  this  walk  of  life  than  in  any  other.  A  con- 
stant process  of  trial  is  going  on.  Those  who  have  the  requisites 
for  success  come  to  the  fore,  those  who  lack  in  some  essential  drop 
to  the  rear. 

The  drift  of  all  this  is  that  in  the  business  career,  as  compared 
with  most  others,  inborn  capacity  counts  more,  training  and  en- 
vironment less.     Environment  and  ease  of  start  seem  to  be  of 


174  THE  DISTRIBUTION  OF  WEALTH  [49-§5 

consequence  in  what  we  may  call  the  middle  range  of  the  occu- 
pation —  the  businesses  of  moderate  scale,  requiring  a  substan- 
tial capital  and  yielding  respectable  middle-class  income,  but 
calling  for  no  unusual  degree  of  judgment  or  administrative 
ability.  The  growth  of  large-scale  operations  in  every  direction 
has  made  businesses  of  this  sort  relatively  less  important  and  nu- 
merous than  they  were  half  a  century  ago.  No  doubt,  they  are 
still  numerous  and  important;  and,  as  to  them,  there  may  be  some- 
thing like  a  caste  or  non-competing  group.  They  tend  to  remain 
in  the  hands  of  those  who  have  the  advantages  of  capital  and  con- 
nection. So  far  as  they  are  concerned,  it  may  be  true  that  there 
are  plenty  of  persons  in  the  so-called  lower  group  of  society  and  in 
the  working  classes  who  could  take  charge  equally  well.  But  in 
the  upper  range  of  the  business  world,  in  the  large  enterprises 
which  dominate  more  and  more  the  industry  of  modern  times, 
native  ability  tells. 

Native  ability  is  recruited  from  all  classes.  There  are  conspicuous 
cases  of  men  rising  from  the  ranks.  Yet  most  of  those  who  come 
to  the  fore  have  probably  begun  with  the  associations  and  envi- 
ronment of  property  and  of  business.  The  commonest  case  is  that 
of  the  young  man  born  in  the  middle  class  and  imbued  with  its  tra- 
ditions and  ambitions,  inheriting  vigor  and  judgment,  but  not  en- 
ervated by  the  inheritance  of  large  means.  As  has  already  been  re- 
marked, the  farming  class  in  the  United  States,  which  belongs  in 
its  traditions  and  outlook  rather  to  the  possessing  than  to  the  non- 
possessing  class,  has  been  in  this  country  a  great  nursery  of  busi- 
ness ability.  Possibly  there  is  a  fund  of  such  ability  hidden  and 
smothered  among  the  hired  workingmen.  But  the  ease  with 
which  capable  men  make  their  way,  even  from  the  poorest  be- 
ginnings, speaks  against  the  supposition.  So  simple  is  access  to 
this  career,  so  common  is  the  rise  of  the  capable  from  the  ranks, 
so  constant  and  searching  the  process  of  natural  selection  in  the 
business  world,  that  we  may  regard  it  as  probable  that  all  who 
have  marked  natural  gifts  are  enabled  to  exercise  them.  It  is 
almost  certain  that  such  gifts  have  a  preponderant  influence  in 
determining  business  success. 


49-§6]  BUSINESS  PROFITS  175 

§  6.  .TJjje_aim  of  the  business  man  is  to  "  make  money,"  and  the    1 
chief  motive  which  stirs  him  to  making  it  is  social  ambition.  ' 

The  successful  business  man  is  the  backbone  of  the  well-to-do 
and  possessing  classes  of  modern  society.  His  ambition  is  to 
accumulate,  not  merely  to  earn  a  living.  The  lawyer,  the  phy- 
sician, the  teacher,  is  reasonably  content  if  he  succeeds  in  support- 
ing and  rearing  a  family  according  to  the  standards  of  his  class,  and 
in  making  some  moderate  provisions  for  the  future;  tho,  being  in 
close  association  with  the  business  set,  he  may  be  infected  also 
with  the  fever  of  accumulation.  But  the  business  man  cannot 
escape  that  infection.  The  aim  of  all  in  his  class  is  to  gain  more 
than  enough  for  support.  To  get  together  a  competence  or  a  for- 
tune is  the  one  test  of  "success."  He  must  be  able  in  his  later 
days  to  live  at  leisure  on  his  settled  income,  or  at  least  transmit 
to  his  descendants  the  opportunity  of  leisure.  We  do  not  com- 
monly think  of  the  money-maker  as  a  person  who  sa\es.  Not 
infrequently  he  is  a  liberar spender.  But  he  spends  less  than  he 
makes.  His  one  aim  is  to  make  a  great  deal  more  than  he  spends 
and  to  put  it  by.  His  accumulations,  tho  they  may  involve 
little  conscious  sacrifice,  are  none  the  less  real  savings,  and  con- 
stitute probably  the  most  important  source  of  the  community's 
supply  of  capital.  Tho  no  statistical  or  quantitative  measure- 
ment is  feasible,  it  is  probable  that  the  larger  portion  of  the 
extraordinary  growth  of  capital  during  the  last  two  centuries  has 
come  from  the  competences  and  fortunes  of  the  business  class. 

Every  successful  business  man  thus  leaves  behind  him  a  trail  of 
accretions  to  the  well-to-do  classes.  His  children  start  with  ad- 
vantages of  education,  environment,  easy  command  of  capital. 
Their  occupations,  their  ambitions,  their  standards  of  living,  are 
on  a  new  plane.  If  they  inherit  ability,  it  finds  scope  for  exercise 
at  once.  If  they  have  only  moderate  capacity,  the  best  is  made  of 
this  by  training.  Often  the  riches  which  they  inherit  prove  a 
treacherous  gift,  preventing  the  use  of  good  natural  powers  and 
encouraging  sloth  and  dissipation.  There  was  a  tradition  in  older 
days  that  new-made  wealth  did  not  remain  long  in  the  same  family. 
It  was  said  to  be  but  three  generations  from  shirt  sleeves  to  shirt 


176  THE  DISTRIBUTION  OF  WEALTH  [49-§6 

sleeves.  No  such  generalization  would  be  tenable  to-day.  The 
machinery  for  safely  investing  and  keeping  accumulated  property 
is  highly  developed  and  is  at  any  one's  command.  They  who  once 
possess  can  continue  to  hold,  and  persons  who  have  been  lifted  among 
the  soft-handed  classes  cling  to  their  place  with  extraordinary 
tenacity.  While  there  is  a  continuous  movement  upward  —  not 
great  in  volume,  but  steady  and  considerable  —  there  is  no  appre- 
ciable movement  downward. 

The  most  powerful  spur  to  the  business  man's  activity,  to  re- 
peat, is  social  ambition.  The  deep-rooted  impulse  of  emulation 
"leads  hirn  to  try  and  swing  himself  into  the  ranks  of  his  "betters." 
The  pride  of  commanding  the  services  of  others,  the  instinctive 
craving  for  external  marks  of  distinction  and  superiority,  have 
been  gratified  in  modern  times  most  commonly  and  most  readily 
thru  money-making. 

Other  motiyeg  have  played  their  part.  A  true  taste  for  the  re 
finements  of  an  easier  and  ampler  life,  an  appreciation  of  what  is 
intrinsically  and  permanently  beautiful,  has  sometimes  been  a 
motive  to  pecuniary  gain;  tho  it  is  to  be  suspected  that  genuine 
feelings  of  this  sort  are  less  common  among  the  business  men  them- 
selves than  among  their  descendants,  and  not  too  common  among 
the  latter.  The  love  of  power,  which  is  closely  allied  to  the  in- 
stinct of  emulation,  is  a  strong  spur  to  unceasing  accumulation. 
Mere  megalomania  sometimes  appears  among  the  captains  of  in- 
dustry —  a  desire  to  bring  larger  and  larger  domains  under  subjec- 
tion. With  all  this  goes  the  impulse  to  activity.  Idleness  soon  palls. 
Many  a  business  man  whose  wealth  far  exceeds  the  ambition  of  his 
early  days  continues  none  the  less  to  scheme  and  to  work,  from  lack 
of  anything  else  to  do.  He  has  learned  to  play  the  engrossing  game 
of  money-making;  he  can  play  no  other  that  satisfies  him  for  long; 
he  continues  to  make  money  in  order  to  escape  being  bored. 

The  desire  for  wealth  which  possesses  the  business  class  is  thus 
not  a  simple  motive,  but  one  very  complex.  It  is  much  to  be  wished 
that  other  and  nobler  motives  could  be  substituted,  and  that  the 
same  courage,  judgment,  and  strenuous  work  could  be  brought  to 
bear  for  rewards  of  a  different  sort  and  with  less  unwelcome  con- 


49-§7I  BUSINESS  PROFITS  177 

sequences  in  the  inequalities  of  worldly  possessions.  Something 
of  the  sort  is  dreamed  of  as  feasible  by  those  who  would  completely 
overturn  the  regime  of  private  property.  Not  high  money  gains, 
but  a  ribbon,  a  laurel  wreath,  the  spur  of  fame,  should  suffice  to 
call  out  the  best  energies  of  the  industrial  leader.  What  may  be 
these  possibilities,  we  shall  have  occasion  to  consider  elsewhere.* 
Certain  it  is  that  in  the  past  the  coarser  motives  have  mainly  pre- 
vailed. In  them  and  in  their  power  over  the  mass  of  mankind  is 
the  psychological  lever  which  explains  the  great  upward  economic 
movement  of  the  last  two  centuries.  It  is  probable  that  motives 
of  the  same  sort  will  long  continue  to  operate  and  will  long 
continue  to  be  indispensable  for  sustained  material  progress.  The 
business  man  as  we  know  him,  with  his  virtues  and  his  faults,  his 
good  and  his  evil  effects  on  society,  will  long  be  a  factor  of  the  first 
importance  in  the  distribution  of  current  earnings  and  in  the  shap- 
ing of  social  stratification. 

§  7.  By  way  of  bringing  into  sharper  relief  some  of  the  con- 
clusions reached  in  this  chapter  and  those  preceding  it,  let  us 
make  two  extreme  suppositions:  first,  that  capable  business.pien 
of  the  highest  order  are  very  plentiful;  second,  that  stout,  able- 
bodied,  unskilled  laborers  are  very  scarce.  In  other  words,  let 
us  suppose  that  the  conditions  of  supply  for  these  two  sorts  of 
service  are  precisely  the  reverse  of  what  they  are  at  present. 

If  capable  business  men  were  very  plentiful,  every  species  of 
enterprise  would  be  conducted  with  the  utmost  judgment,  vigor, 
and  intelligence.  The  smallest  retail  shop  would  be  managed 
with  the  same  ability  as  the  largest  trading  or  manufacturing 
concern.  At  present,  the  highest  ability  is  turned  to  those  great 
enterprises  in  which  it  tells  most;  precisely  as  central  sites  in  cities 
are  turned  to  those  kinds  of  business  for  which  their  advantages 
tell  most.  With  an  indefinitely  large  supply  of  first-rate  busi- 
ness ability,  this  sort  of  human  power  would  be  directed  not  only 
to  the  channels  in  which  it  was  most  effective,  but  to  others  in 
which  it  was  less  effective.  The  gain,  or  addition  to  the  output, 
resulting  from  this  application  under  the  least  favorable  circum- 

1  See  Chapter  67,  §  3. 


178  THE  DISTRIBUTION  OF  WEALTH  [49-§7 

stances  —  in  other  words,  from  its  marginal  effectiveness  — 
would  determine  the  remuneration  for  all  persons  having  such 
capacity.  We  may  assume,  for  simplicity's  sake,  all  these  to  be 
of  equally  high  capacity.  In  the  next  chapter,  the  consequence 
of  differences  among  them  will  be  considered ;  for  the  present  argu- 
ment, it  is  not  material  whether  we  assume  complete  equality  or 

.  admit  some  differences  of  degree.  All  those  of  high  efficiency  would 
be  immensely  more  plentiful  than  men  of  similar  ability  now  are, 
and  their  gains  would  be  very  much  less  than  are  now  the  gains  of 
such  men. 

The  general  efficiency  of  all  the  labor  of  society  under  such 
conditions  would  be  very  much  greater  than  it  now  is.  Every 
business,  from  the  largest  factory  to  the  smallest  shop,  would  be 
so  managed  as  to  secure  the  utmost  return  for  every  scrap  of 
expenditure.  All  goods  and  services  would  be  more  plentiful. 
But  the  share  going  to  the  business  men  would  be  less.     If  we  con- 

!  ceive  the  process  to  be  carried  to  its  farthest  limit,  and  good  busi- 
ness men  to  be  as  plentiful  as  common  unskilled  laborers  now  are, 
their  reward  would  be  on  very  much  the  same  level  as  that  now 
current  for  common  day  wages. 

Turn  to  the  other  supposition.  Suppose  the  human  race  vastly 
deteriorated  in  its  physique;  the  great  majority  of  men  incapable 
of  holding  the  plow  or  lifting  the  pick.  Then  the  few  who  were 
still  able  to  perform  sustained  manual  labor  would  receive  high 
rewards.  No  kind  of  labor  is  so  little  to  be  dispensed  with.  As 
the  huge  warrior  was  the  admired  hero  in  the  days  of  Achilles, 
so  in  a  society  where  common  labor  was  scarce  the  much-envied 
person  would  be  the  brawny  workman.  He  would  be  highly 
paid,  because  the  marginal  utility  of  his  labor  would  be  great; 
and  that  which  is  scarce  and  is  paid  for  at  a  high  rate  commands 
general  esteem.  No  doubt  the  muscular  laborer  would  look  down 
with  contempt  on  the  rest  of  mankind,  dependent  as  they  would 
be  on  him  for  the  necessaries  of  existence;  precisely  as  the  capital- 
ist business  man  now  regards  with  contempt  the  day  laborer,  de- 
pendent on  him  for  the  opportunity  to  make  a  living.  Social 
stratification  would  be  turned  topsy-turvy. 


49-§7]  BUSINESS  PROFITS  179 

Brains  being  scarce  by  nature,  such  a  complete  reversal  of  posi- 
tions is  beyond  the  range  of  possibility.  But  some  approach  to  a 
position  midway  between  the  extremes  is  not  inconceivable.  Bus- 
iness ability  may  become  much  more  common  than  it  is  now.  In 
the  course  of  generations,  the  supplies  of  the  different  sorts  of  pro- 
ductive capacity  may  be  greatly  changed;  and  then  the  variations 
m  earnings  and  the  consequent  differences  in  social  station  may  be 
correspondingly  changed. 


CHAPTER  50 
Business  Profits,  continued 

Section  1.  Analogy  between  business  profits  and  rent.  A  similar  analogy 
in  other  occupations.  How  far  the  element  of  risk  vitiates  the  analogy, 
180  — ■  Sec.  2.  The  difference  in  business  abilities  explains  differences  in 
cost  of  production.  The  conception  of  the  "representative  firm"  as 
settling  normal  expenses  of  production,  183  —  Sec.  3.  One  of  the  mani- 
festations of  business  ability  is  in  the  selection  of  good  natural  resources. 
In  the  end,  an  important  d  fference  between  economic  rent  and  differential 
business  profits,  185  —  Sec.  4.  The  connect  on  between  the  return  on 
capital  and  business  profits.  Relations  between  owners  and  managers  of 
capital  at  different  times.  Modern  tendency  towards  a  separation  of 
functions  and  rewards,  187  —  Sec.  5.  For  considerable  periods,  command 
of  capital  brings  in  a  given  enterprise  the  probabihty  of  larger  profits;  but 
not  in  the  long  run  without  business  ability,  189  —  Sec.  6.  For  industry  as 
a  whole  and  capital  as  a  whole,  there  is  a  connection  between  interest  and 
business  profits.  How  they  may  diverge  in  the  end,  190  —  Sec.  7.  A 
view  of  business  profits  which  distinguishes  them  sharply  from  wages,  as 
arising  solely  in  a  dynamic  state,  192  —  Sec.  8.  Another  view,  which 
lays  emphasis  on  risk,  and  distinguishes  between  the  wages  of  salaried 
managers  and  the  "profits"  of  independent  business  men.  The  salaried 
manager  often  rewarded  de  facto  in  proportion  to  "profits,"  193  —  Sec.  9. 
Legitimate  and  illegitimate  business  profits.  Their  restriction  within  the 
legitimate  limits  depends  on  the  removal  of  monopoly  gains  and  the 
maintenance  of  a  high  plane  of  competition,  195. 

§  1.  In  the  preceding  chapter  the  earnings  of  business  men  have 
been  treated  chiefly  in  their  bearing  on  the  problems  which  are 
connected  with  differences  in  wages  and  with  the  social  consequences 
of  such  differences.  We  may  proceed  now  to  the  relations  between 
profits  on  the  one  hand,  and  rent,  wages,  and  interest  on  the  other; 
and  to  various  ways  of  making  money  that  are  doubtfully  to  be 
classed  under  the  head  of  business  profits. 

An  analogy  between  business  profits  and  rent  has  often  been 
pointed  out.  High  capacity  in  a  business  man  is  like  high  pro- 
ductiveness in  fi  site.     The  effectiveness  of  the  labor  and  capital 

180 


50-§ll  BUSINESS  PROFITS  (Continued)  181 

managed  by  a  capable  man  is  greater  than  that  of  labor  and  capi- 
tal managed  by  one  less  capable ;  just  as  labor  applied  on  good  soils 
yields  more  than  labor  applied  on  poor  soils.  If  there  were  an 
indefinitely  extensible  supply  of  able  business  men,  no  one  of  them 
could  secure  high  earnings.  In  the  same  way,  good  land  would  not 
yield  a  rent  if  there  were  an  indefinite  supply  of  it.  This  mode  of 
treating  business  profits  was  developed  most  systematically  and 
emphatically  by  Francis  A.  Walker,  and  it  became  a  corner  stone 
of  his  theory  of  distribution. 

The  same  analogy  exists  in  the  differences  between  the  earnings 
of  men  of  varying  gifts  in  other  occupations.  The  talented  sur- 
geon or  physician  earns  more  than  his  colleagues  because  he  is  more 
efficient;  and  so  the  lawyer,  the  engineer,  the  architect.  In  any 
group  of  men  who  compete  with  each  other  at  the  same  sort  of 
work,  the  more  efficient  —  that  is,  the  more  productive  —  earn 
more  in  proportion  to  their  efficiency.  So  far  as  the  differences 
are  due  to  inborn  gifts,  the  results  are  in  the  nature  of  rent. 

To  this  it  has  been  objected,  most  effectively  by  Professor  Mar- 
shall, that  allowance  should  be  made  for  the  element  of  risk,  and 
that,  when  such  allowance  is  fully  made,  the  analogy  to  rent  is 
shorn  of  most  of  its  significance.  Tho  there  are  successful  lawyers, 
there  are  also  briefless  barristers.  When  there  are  blanks  as  well 
as  prizes,  it  may  well  happen  that  the  prizes  do  not  suffice  to  offset 
the  blanks,  and  then  the  earnings  on  the  occupation  as  a  whole  con- 
tain no  surplus  and  there  is  no  element  of  rent.  This,  it  is  said,  is 
peculiarly  the  case  with  business  profits.  Success  in  business  is 
highly  uncertain.  Prediction  about  any  individual  who  enters  it 
is  extremely  difficult,  especially  in  the  early  stages  of  a  career. 
It  has  been  supposed  that  only  one  tenth  of  those  who  try  to  es- 
tablish businesses  of  their  own  succeed  in  the  end.  The  estimate 
is  but  guess  work,  and  very  likely  exaggerated.  But  it  points  to  a 
fact.  In  view  of  the  risks  and  theobvious  possibilities  of  failure, 
must  there  not  be  some  prizes  to  maintain  the  resort  to  the  occupa- 
tion? When  regard  is  had  to  business  work  as  a  whole  and  busi- 
ness profits  as  a  whole,  can  the  high  reward  of  the  fortunate  few  be 
regarded  as  a  real  surplus? 


182  THE  DISTRIBUTION  OF  WEALTH  [50- §  1 

There  is  weight  in  the  objection;  but  it  is  not  conclusive.  It  is 
true  that  business  ventures  are  uncertain  as  to  their  outcome,  not 
only  because  it  is  of  their  essence  to  assume  risks,  but  because,  for 
new  aspirants,  it  is  peculiarly  difficult  to  say  in  advance  whether 
they  possess  the  qualities  which  fit  them  to  meet  and  overcome  the 
risks.  On  the  other  hand,  the  extent  of  the  risks  assumed  is  easily 
exaggerated.  The  very  fact  that  no  previous  expensive  training  is 
required  lessens  the  sacrifices  and  disappointments  of  those  who 
try  and  fail.  True,  they  may  lose  some  of  the  means  which  they 
owned  or  which  have  been  intrusted  to  them ;  and  this  loss  is  some- 
times large.  Usually,  however,  the  first  steps  in  business  are 
on  a  modest  scale,  and  experiment  on  a  modest  scale  suffices  to  test 
whether  there  is  the  requisite  capacity.  If  there  is  failure,  the  un- 
lucky aspirant  falls  back  into  the  ranks  of  the  hired  class,  and  be- 
comes a  clerk,  bookkeeper,  superintendent.  His  earning  power  is 
less  than  he  had  hoped,  but  it  is  not  reduced  to  zero. 

There  may  seem  to  be  a  difference  in  this  regard  between  the 
business  calling  and  the  professions  that  require  set  training.  The 
expensive  and  elaborate  preparation  for  a  legal  career  may  prove 
to  have  been  thrown  away.  The  would-be  lawyer  may  not  have 
it  in  him  to  attain  success  in  the  law.  But  the  risk  of  this  in  most 
professions  is  not  comparable  to  the  risk  of  failure  in  active  busi- 
ness. Ordinarily  he  who  has  a  good  training  for  a  profession  is 
reasonably  sure  of  getting  a  living  from  its  practise.  He  may  not 
win  one  of  the  prizes,  but  he  is  likely  to  secure  a  modest  income, 
sufficient  to  make  the  investment  in  his  education  worth  while. 
Such  is  the  situation  with  physicians,  engineers,  architects,  teach- 
ers. The  risks  are  perhaps  greater  in  the  law,  as  the  prizes  are  also 
greater.  Great  pecuniary  success  in  the  law  depends  not  only  on 
high  intellectual  qualities,  but  on  the  business  qualities  also.  Some 
professions  there  are,  again,  for  which  a  long  and  elaborate  prep- 
aration is  required,  and  in  which  the  outcome  is  yet  highly  un- 
certain. Painting,  the  composition  and  performance  of  music, 
opera  singing,  are  such.  Considerable  promise  and  the  presence  of 
a  true  vein  of  talent  may  end  in  nothing  but  virtual  failure  in  these 
arts;  for  only  a  very  high  pitch  of  ability  and  achievement  brings 


50-1 2]  BUSINESS  PROFITS  (Continued)  183 

a  valued  success.  Even  here,  there  is  the  humdrum  routine  of 
teaching  to  fall  back  on  —  sadly  disappointing  to  the  ambitious 
artist  but  usually  sufficing  to  eke  out  a  living.  In  any  case,  the  ar- 
tistic callings  are  exceptional,  resorted  to  by  comparatively  few 
and  affected  largely  by  other  motives  than  those  ordinarily  leading 
men  to  their  choice  of  a  career.  On  the  whole,  in  the  so-called 
professions,  the  risk  of  failure  is  not  great.  _Investment  in  an  edu^ 
cation  usually  brings  its  return. 

T^hus,  for  somewhat  different  reasons,  the  element  of  risk  does 
not  play  so  vital  a  part,  either  in  business  or  in  the  professions,  as 
to  neutralize  the  significance  of  individual  differences  in  earnings. 
In  business,  the  initial  stake  is  not  so  great;  in  the  professions,  the 
winning  of  a  fair  return  is  not  so  uncertain.  Some  men  are  born 
more  capable  than  others,  and  the  higher  range  of  their  earnings, 
due  to  unusual  gifts,  is  analogous  to  rent.  Since  inborn  differences 
play  a  relatively  more  important  part  in  business  profits  than  in 
other  earnings  of  the  well-to-do,  the  analogy  to  rent  is  closer. 

But  this  sort  of  reasoning  can  throw  light  only  on  the  differences 
of  business  profits,  and  especially  on  that  upper  range  of  incomes  to 
which  hitherto  we  have  chiefly  given  attention.  In  the  lower 
ranges  of  business  earnings  as  well  as  professional  earnings,  the 
forces  at  work  are  the  same  as  those  governing  wages  in  general. 
IJence  the  rent  theory  of  profits  can  throw  no  light  on  the  funda- 
mental questions.  These  are  inextricably  connected  with  the 
general  problem  of  wages. 

§  2.  The  differences  in  the  abilities  of  business  men  engaged  in 
the  same  occupation  constitute  the  main  explanation  of  a  phenom- 
enon which  has  puzzled  many  observers  —  the  variations  in  the 
expenses  of  production  between  competing  establishments.  In 
the  discussion  of  value,^  we  considered  industries  having  constant 
returns  and  commodities  whose  value  is  determined  by  expenses  of 
production  uniform  for  all  competitors.  But  it  has  been  repeat- 
edly pointed  out  that  in  fact  no  such  uniformity  exists.  In  no 
considerable  industry  of  modern  times  are  competitors  on  the  same 
plane.     Some  produce  more  cheaply  than  others,  having  better 

1  See  Chapter  12. 


184  THE  DISTRIBUTION  OF  WEALTH  l50-§2 

plants,  better  organization,  command  of  more  efficient  or  cheaper 
labor  or  of  cheaper  materials,  more  "strategic"  location. 

If  such  differences  were  permanent  and  unalterable,  they  would 
bring  all  industries  into  the  class  of  diminishing  returns  and  would 
make  the  principle  of  rent  applicable  universally.  ^'But  they  are 
not  permanent  or  unalterable,  except  so  far  as  good  sites  or  cheap 
raw  materials  are  limited.  Most  of  the  circumstances  which  are 
commonly  referrbd  to  as  showing  wherein  different  enterprises  have 
varying  expenses  are  due  at  bottom  to  the  personal  qualities  of  their 
business  leadersr"1[fseme  have  better  plajjts  or  nioreajy^antageous 
locaTions  than  others,  it  is  because_they  .have  been  planned  with 
greater  skill  and-Jotesighjfe.  Especially  under  those  conditions  of 
rapid  advance,  in  the-^rts-whieh -characterize  ^odern~  times,  op- 
portunities for  improveme»ts  in  the  industriatjoutfit— are  first 
availed  of  with  shrewdness  and  daring  by  the  captains  of  industry, 
and  then  imitated  by  others  of  less  tho  still  of  notable  capacity. 
Whenr.the  great  mass  of  those  enf^edi?!  a  ^en.  industry  succeed 
in  adopting  the  improvement  oPthe  leaders,  these  leaders  devise 
still  further  improvements;  and  the  differences  in  facilities  and  ex- 
penses of  production  are  thus  maintained  indefinitely. 

To  fit  this  situation  into  our  reasoning  on  value  and  expenses  of 
production,  we  may  adopt  Professor  Marshall's  notion  of  the  "rep- 
resentative firm"  —  one  not  far  in  the  lead,  not  equipped  with 
the  very  latest  and  best  plant  and  machinery,  but  well  equipped, 
well  led,  and  able  to  maintain  itself  permanently  with  substantial 
profits.  Side  by  side  with  such  representative  firms  are  the  ex- 
ceptional leaders.  Side  by  side  with  them  are  also  the  weak  and 
the  struggling  —  some  under  inept  management  and  doomed  to 
failure,  and  others  under  good  management  but  still  in  the  early 
stages  of  scant  capital  and  unestablished  connection.  Prices  tend 
to  adjust  themselves  to  the  expenses  of  production  at  the  hands  of 
the  representative  firm.  When  conditions  are  normal  and  settled 
in  the  industry,  that  firm  earns  "fair"  profits  —  such  business 
profits  as  business  men  of  good  ability  secure  in  industry  at  large. 
Their  superiors  earn  much  more.  Their  inferiors  earn  less;  per- 
haps go  to  the  wall,  perhaps  rise  slowly  to  better  fortune. 


50-§3]  BUSINESS  PROFITS  (Continued)  185 

If  now  an  ill  turn  is  encountered  by  such  industry  —  if  demand 
should  suddenly  fall  off,  or  heavy  taxes  should  be  imposed  by  the 
state  —  the  first  effect  will  be  to  cause  the  weak  and  struggling 
firms  to  disappear,  the  representative  firms  to  lose  money  or  at 
'"least  to  fail  to  make  money,  the  leading  firms  to  submit  to  lessened 
profits.  Tlie  ultimate  efi^ect  will  be  that  some  of  the  representative 
"^rms^will  withdraw,  some  perhaps  will  fail.  Some  of  the  leaders 
will  transfer  their  energies  into  other  directions.  Indeed,  a  keen 
eye  for  the  prospects  of  an  industry,  a  shrewd  selection  of  those 
industries  about  to  enter  a  period  of  prosperity  and  a  quick  aban- 
donment of  those  threatened  with  reverses,  are  among  the  quali- 
fications of  the  money-maker.  The  converse  takes  place  if  an  in- 
dustry has  a  good  turn,  thru  an  unexpected  increase  of  demand  or  a , 
rapid  cheapening  of  its  raw  materials.  Then  every  one  engaged  in  it 
makes  money,  even  the  ill-equipped.  The  able  and  well-equipped, 
who  happen  to  be  in  the  best  condition  for  taking  advantage  of  the 
favorable  conditions,  may  roll  up  fortunes  in  short  order.  How 
soon  and  how  easily  the  readjustment  to  normal  conditions  will 
take  place  depends  on  the  extent  of  the  irrevocably  invested  plant, 
on  the  predictability  of  demand,  and  in  some  degree  on  the  personal 
characteristics  of  the  active  leaders  in  the  industry.  As  in  all  mat- 
ters that  depend  on  human  impulses  and  human  calculations,  no 
mechanical  regularity  in  the  phenomena  is  to  be  expected.  It  is 
only  in  the  long  run  that  able  business  men  secure  incomes  in  ac- 
cord with  their  ability ;  it  is  only  in  the  long  run  that  they  and  their 
imitators  transfer  their  energies  from  unprosperous  to  prosperous 
industries;  it  is  only  in  the  long  run  that  the  representative  firms 
and  their  expenses  of  production  prove  to  have  a  dominating  effect 
on  the  range  of  prices. 

§  3.   The  differences  between  individual  producers  not  only  have., 
an  analogy  to  rent  but  have  their  effects  on  rent  and  on  distri- 
bution.    A  capable  business  man  who  happens  to  own  an  advan- 
tageous site  may  be  said  to  get  two  sorts  of  rent  —  that  from  the 
exceptional  site  and  that  from  his  exceptional  ability. 

We  might  expect  these  two  sorts  of  gain  to  be  quite  disconnected. 
The  able  man,  it  would  seem,  can  apply  his  ability  at  the  margin  as 


186  THE  DISTRIBUTION  OF  WEALTH  [50-§3 

well  as  above  the  margin.  In  fact,  he  usually  applies  it  above  the 
margin.  One  of  the  manifestations  of  ability  is  the  prompt  and 
full  perception  of  the  possibilities  of  the  good  sites.  They  usually 
get  under  the  control,  by  purchase  or  by  lease,  of  the  capable  man- 
agers, and  are  exploited  to  better  advantage  by  these  than  they 
would  be  by  the  less  capable.  In  agriculture,  the  better  farmers 
buy  or  rent  the  better  lands,  and  secure  a  combined  rent  of  ability 
and  of  fertility  (or  situation)  greater  than  could  be  secured  by 
ability  alone  or  fertility  alone.  This  is  strikingly  the  case  with 
urban  rent.  The  expensive  business  sites  are  almost  invariably 
utilized  by  the  upper  tier  of  business  men  —  the  captains  of  indus- 
try and  the  solid  merchants  of  the  great  cities.  The  more  expen- 
sive the  site,  the  more  likely  is  it  to  be  in  the  hands  of  a  man  of 
exceptional  gifts.  There  is  a  sort  of  pitting  against  each  other  two 
kinds  of  rarities  —  the  sites  and  the  men.  If  business  men  of 
marked  ability  are  very  numerous,  they  bid  against  each  other  for 
the  central  sites  and  urban  rent  rises  to  a  level  by  so  much  higher. 
If  there  are  fewer  of  them,  they  are  able  in  a  greater  degree  to  retain 
in  their  own  hands  the  gains  which  can  be  reaped  on  those  sites. 

One  word  more  as  to  the  resemblance  between  business  profits 
and  rent.  All  differences  in  wages  which  result  from  the  non-com-^ 
peting  groups  and  which  thus  are  not  of  the  equalizing  sort,  may 
be  said  to  be  analogous  to  rent.  The  carpenter  earns  more  than 
the  day  laborer  because  the  supply  of  his  services  is  limited  and  be- 
cause the  utility  of  his  services  is  greater.  There  is  thus  in  all  real 
differences  of  wages  an  element  similar  to  rent.  But  there  is  an 
important  distinction  between  these  cases  and  the  rent  of  natural 
agents.  In  the  one,  human  action  and  human  motive  alone  are  in 
operation;  in  the  other,  nature's  limitations  are  the  essential  factor. 
The  carpenter  and  the  business  man  put  forth  their  powers  because 
of  a  reward,  and  are  stimulated  to  put  them  forth  the  more  as  the 
reward  becomes  higher.  The  differences  between  good  sites  and 
bad  sites  are  irrespective  of  such  motives.  And  in  its  social  aspects 
this  distinction  is  all-important.  It  is jiot impracticable  for  society 
to  appropriate  in  some  way  economic  rent  and  monopoly  gains. 
But  the  appropriation  of  the  extra  gains  which  human  beings  se- 


50-§4]  BUSINESS  PROFITS  (Continued)  187 

cure  because  of  their  possession  of  unusual  faculties  Avould  check 
the  exercise  of  those  faculties.  It  would  perhaps  be  going  too  far 
to  say  that  it  would  quite  prevent  their  exercise.  Other  motives 
than  those  of  pecuniary  gain  may  conceivably  be  made  more  effec- 
tive than  now.  But  as  men  are,  and  as  private  property  and  com- 
petition now  influence  them,  nearly  all  need  the  spur  of  material 
reward  to  bring  into  full  exercise  their  abilities.  The  extra  gain  is 
a  price  which  society  must  pay  in  order  to  secure  the  extra  service. 

§  4.  If  business  profits  are  in  some  respects  analogous  to  rent, 
they  are  in  other  respects  closely  related  to  interest. 

We  have  tacitly  assumed  that  so  much  of  a  business  man's  in- 
come is  to  be  regarded  as  profits  as  is  in  excess  of  interest  on  the 
capital  which  he  manages.  If  he  happens  to  borrow  his  capital, 
that  is  clearly  true.  He  then  pays  interest  to  another,  and  only 
his  net  earnings  over  and  above  interest  go  to  him  as  business  prof- 
its. Usually  his  capital  is  partly  borrowed  and  partly  his  own  (or 
that  of  relatives  or  friends,  put  at  his  disposal  from  other  than  cold- 
blooded pecuniary  motives).  On  that  part  which  is  his  own,  he 
must  indeed  remember  that  interest  could  be  got  at  current  rates 
without  the  risk  and  labor  of  actual  management;  and  therefore  he 
must  reasonably  reckon  only  the  excess  over  such  interest  as  his 
earnings  of  management  or  business  profits.  This  way  of  regarding 
the  situation  is  followed  in  an  arrangement  found  in  many  firms 
which  have  silent  or  inactive  partners.  Out  of  the  net  earnings  of 
a  given  period,  say  a  year,  interest  is  first  allowed  on  the  capital 
put  in,  whether  by  the  active  partners  or  by  the  others.  The  ex- 
cess, after  paying  all  interest,  then  constitutes  the  business  profits 
proper.  Out  of  this,  there  is  first  allotted  a  fixed  payment  in  the 
nature  of  salary  to  the  active  partners.  The  remainder  is  divided 
between  active  and  inactive  partners  in  proportion  to  capital  pro- 
vided by  them,  and  constitutes  a  return  for  risk,  general  oversight, 
and  judgment. 

Such  a  sharp  distinction  between  the  constituent  parts  of  gross 
profits  is  of  course  more  likely  to  be  made  where  there  is  a  corre- 
sponding division  of  functions  —  where  some  provide  the  capital, 
others  do  the  active  work  of  management;  where  some  share  the 


188  THE  DISTRIBUTION  OF  WEALTH  [50-§4 

risks,  others  do  not.  In  the  eighteenth  century  the  common  form  of 
business  organization,  the  private  firm  or  partnership,  was  not  such 
as  to  suggest  the  distinction.  Then  the  investor,  the  person  look- 
ing to  a  return  in  the  way  of  interest  only,  had  little  to  do  with  busi- 
ness ;  his  investments  were  in  land  or  in  public  funds.  The  business 
man  borrowed  occasionally  from  banks  or  professional  money 
lenders,  but  had  no  permanent  associates  divorced  from  the 
management.  Hence  the  economists  of  those  days  regarded 
business  profits  as  one  homogeneous  return  secured  by  merchants 
and  capitalist  employers.  Among  the  British  economists,  this 
mode  of  treatment  continues  nearly  to  our  own  day.  Adam 
Smith  regarded  gross  profits  as  the  return  both  to  capital  and 
to  the  managers  of  capital.  He  remarked  that  double  interest 
was  regarded  as  a  fair,  moderate,  reasonable  profit.  High  profits 
and  high  interest  went  together;  and  he  adduced  the  historical 
fluctuations  in  interest  as  indicative  of  the  fluctuations  in  profits. 

In  modern  times  the  growth  of  corporations  has  brought  about  a 
vast  participation  by  investors  in  business  enterprises,  a  division 
of  function  between  business  men  and  investors,  and  hence  greater 
attention  to  the  really  different  nature  of  their  doings  and  earnings. 
Many  corporations  borrow  on  long  time  in  the  form  of  bonds, 
whose  holders  are  supposed  to  be  free  from  risks  and  to  receive  pure 
interest,  while  yet  they  are  permanently  associated  with  the  enter- 
prise. The  holders  of  stock  are  something  more  than  investors 
pure  and  simple.  They  are,  in  a  way,  silent  partners;  they  exer- 
cise judgment  and  assume  risk.  The  actual  work  of  management 
is  in  the  hands  of  salaried  managers,  who  in  addition  may  or  may 
not  be  stockholders. 

This  relation  between  the  different  persons  concerned  appears 
most  clearly  in  the  early  stages  of  enterprises,  especially  of  large- 
scale  enterprises.  The  investor  who  is  looking  for  a  return  in  the 
way  of  interest  pure  and  simple,  does  not  take  shares  in  new  under- 
takings ;  he  buys  "  solid  "  bonds.  Those  who  "  go  in  "  for  new  ven- 
tures are  largely  the  experienced  business  men  and  the  clientele 
which  such  business  men  gather  about  them.  They  "go  in"  largely 
on  their  judgment  of  men.     If  John  Smith,  whom  they  believe  in. 


5(>-§5]  BUSINESS  PROFITS  (Continued)  189 

fathers  a  scheme,  they  often  take  shares  without  very  deHberate 
consideration  of  the  prospects.  They  expect  to  secure  more  than 
interest  on  what  they  invest;  otherwise  they  would  not  assume 
the  risks.  As  time  goes  on,  if  the  venture  has  proved  success- 
ful, and  dividends  at  a  good  rate  have  been  secured  for  a  consider- 
able period,  they  sell  out  to  investors  at  a  premium.  If  the  enter- 
prise is  then  a  thoroly  settled  one,  these  investors  may  take  vir- 
tually no  risks,  and  their  return  does  not  exceed  bare  interest;  tho 
some  degree  of  risk,  even  if  slight,  is  not  to  be  avoided  in  holding 
of  stock.  The  active  business  man  or  venturesome  investor  w'ho 
has  thus  sold  out  at  a  profit  then  turns  to  still  other  new  enterprises, 
and  may  repeat  the  process  indefinitely.  His  returns  are  to  be 
considered  mainly  business  profits,  while  those  of  the  investor, 
whether  bondholder  or  owner  of  "gilt-edged"  stocks,  are  mainly 
interest,  with  some  admixture  of  capitalized  rent  and  monopoly 
gains. 

§  5.   For  short  periods,  even  for  periods  of  considerable  length,  i 
business  profits  and  interest  are  often  closely  connected.     Large, 
command  of  capital  commonly  brings  to  an  individual  enterprise! 
not  only  returns  in  the  way  of  interest  proportionate  to  the  amount 
of  capital,  but  a  better  chance  for  large  profits. 

For  an  individual,  the  larger  or  smaller  capital  which  is  at  his 
command,  and  the  consequent  larger  or  smaller  scale  of  operations, 
have  an  important  influence  on  his  net  earnings.  At  first  sight, 
these  seem  to  constitute  the  dominating  factor.  The  business  men 
who  produce  or  sell  smaller  quantities  get  the  same  prices  as  those 
producing  or  selling  greater  quantities;  the  expenses  per  unit  of  the 
large-scale  producer  or  merchant  are  usually  less  than  those  of  his 
smaller  rival;  it  seems  to  follow  that,  merely  because  he  has  more 
capital,  his  gains  are  larger.  If  the  management  of  a  great  busi- 
ness called  for  no  more  ability  than  that  of  a  small  one,  and  if  the 
command  of  abundant  capital  came  solely  by  inheritance  or  favor, 
the  consequence  would  certainly  follow.  But  in  the  long  run  the 
connection  between  extent  of  capital  and  volume  of  profits  proves 
to  be  by  no  means  automatic.  Large-scale  operations  require 
more  executive  capacity  than  small  ones,  more  insight  and  judg- 


190  THE  DISTRIBUTION  OF  WEALTH  [5(>-§6 

ment,  more  courage.  In  the  end  command  of  capital  comes  not 
by  accident  but  according  to  ability.  At  the  start,  and  in  ordinary 
times,  it  is  as  easy,  or  at  least  seems  as  easy,  to  manage  a  large  busi- 
ness as  a  small  one.  Hence  the  importance  of  capital  and  connec- 
tion in  the  earlier  stages  of  every  business  man's  career.  Hence 
too  the  more  enduring  influence  of  capital  and  connection  in  those 
businesses  which  never  reach  a  very  considerable  scale,  or  never 
get  beyond  the  simplest  conditions  of  management.  But  with  al- 
most all  enterprises  conditions  change  as  time  goes  on,  new  meth- 
ods or  processes  are  devised  by  the  keen-minded  and  venturesome, 
and  adaptation  to  new  competition  must  take  place.  Then  only 
the  able  and  enterprising  continue  to  control  large  enterprises  and 
large  capital.  The  less  capable  fail  to  make  the  profits  they  expect. 
If,  as  not  infrequently  happens,  they  persist  in  trying  to  manage 
what  overtops  their  capacity,  bankruptcy  ensues  and  their  all  is 
swept  away. 

The  adjustment  of  the  scale  of  operations  and  of  consequent  prof- 
its to  individual  capacity  is  much  affected  by  custom,  established 
reputation,  and  good  will.  A  firm  which  has  been  built  up  by  an 
able  founder  runs  on  for  a  long  time  of  its  own  momentum.  This 
is  particularly  true  of  trading,  both  retail  and  wholesale,  where 
connection  and  reputation  count  much  in  holding  customers.  It 
is  often  true  of  manufacturing,  where  trademarks  may  play  an  im- 
portant part.  It  is  most  of  all  true  of  banking,  where  reputation 
and  good  will  are  of  the  essence  of  profitable  operation.  Those  who 
succeed  to  well-established  enterprises  can  continue  to  reap  large 
gains  even  tho  they  have  no  marked  ability.  But  the  dominant 
influence  of  inborn  gifts  shows  itself  in  time.  Old  firms  decay,  un- 
less regenerated  by  fresh  blood.  New  firms  rise,  and  a  different 
generation  of  business  men  comes  into  control.  Among  these  may 
be  the  capable  sons  of  capable  fathers,  inheriting  ability  as  well  as 
capital  and  connection.  But  most  of  the  new  men  are  not  the  de- 
scendants of  the  old.  They  rise  by  force  of  character  from  small 
beginnings.  Into  their  hands  comes  the  control  of  large  capital 
and  the  grasp  of  large  business  profits. 

§  6.  The  same  close  connection  over  limited  periods,  and  the 


50- §6]  BUSINESS  PROFITS  (Continued)  191 

same  divergence  over  longer  periods,  appear  in  the  relations  be- 
tween interest  as  a  whole  and  business  profits  as  a  whole.  The  factor 
that  most  directly  and  continuously  acts  on  interest  is  the  amount 
which  business  men  can  afford  to  pay  and  which  competition 
compels  them  to  pay.  The  process  by  which  the  return  to  capital 
is  settled  works  out  its  results  thru  its  influence  on  business  profits. 
The  advances  to  laborers  are  made  by  the  active  capitalists  —  the 
business  men  —  and  the  ensuing  increase  in  the  output  comes  first 
into  their  hands;  for  they  act  as  intermediaries  between  hired 
workmen  and  the  investors.  When  gross  profits  (in  Adam  Smith's 
sense  of  the  term)  are  high,  they  are  able  and  willing  to  pay  higher 
interest  or  higher  wages,  or  both;  and  conversely  they  are  able  to 
pay  less  when  gross  profits  are  low.  Improvements  in  the  arts 
w^hich  increase  the  marginal  productivity  of  capital  tend  in  the 
first  instance  to  raise  both  business  profits  and  interest. 

As  time  goes  on,  however,  the  parallel  movement  is  likely  to  be 
modified.  The  mode  in  which  the  gain  shall  be  divided  between 
the  two  depends  on  the  conditions  of  supply  for  business  capacity 
and  for  investors'  savings.  If  savings,  and  so  the  command  of 
capital,  are  abundantly  put  at  the  business  man's  disposal,  a  larger 
share  goes  to  his  profits.  If,  on  the  other  hand,  a  great  number  of 
capable  business  aspirants  bid  for  the  savings,  a  larger  share  goes 
to  interest.  If  both  capital  and  business  power  are  plentiful, 
wages  tend  to  rise;  the  incomes  of  the  possessing  classes  as  a  whole 
tend  to  become  less,  and  the  inequalities  of  wealth  are  by  so  much 
mitigated. 

In  modern  times  it  is  probable  that  business  profits  have  suc- 
ceeded in  retaining  a  comparatively  large  share  of  the  gains  from 
the  great  advances  in  the  arts.  Savings  and  capital  have  re- 
sponded very  rapidly  and  amply  to  increased  possibilities  for  in- 
vestment. The  rate  of  interest  has  remained,  when  long  periods 
are  considered,  fairly  stable,  notwithstanding  the  enormous  ad- 
vances in  accumulation  and  the  enormous  improvements  in  the 
utilization  of  capital  since  the  Industrial  Revolution  set  in.  All  the 
civilized  countries  have  gone  thru  great  bursts  of  progress,  during 
which  the  productiveness  of  labor  has  been  rapidly  increased  and 


192  THE  DISTRIBUTION  OF  WEALTH  [50- §  7 

the  opportunities  have  been  favorable  for  large  gross  profits  and 
high  interest.  Such  was  the  experience  of  England  during  the 
first  three-quarters  of  the  nineteenth  century;  of  Germany  during 
the  last  quarter  of  that  century;  of  the  United  States  during  almost 
the  whole  of  her  history.  Tho  interest  has  gone  up  in  all  these 
countries  during  the  accentuated  periods  of  these  movements,  it  has 
fallen  again  with  each  slackening.  But  business  profits,  for  those 
possessing  the  qualities  of  leadership,  have  been  large  thruout, 
often  portentously  large. 

§  7.  Some  different  views  of  business  profits  —  views  which 
bring  into  deserved  prominence  certain  peculiarities  —  may  now 
be  considered.  They  distinguish  business  profits  sharply  from 
wages.  In  them,  what  a  business  man  gets  is  regarded  as  a  com- 
posite income  even  after  cutting  out  such  constituent  elements  as 
should  properly  be  regarded  as  either  interest  or  rent.  Part  of 
what  he  gets  is  still  thought  to  be  simply  wages ;  but  part  is  neither 
wages,  nor  interest,  nor  rent;  it  is  different  from  any  of  these;  and 
this  peculiar  element  is  alone  regarded  as  "profits." 

Among  these  views  one  lays  special  stress  on  the  consequences 
of  changes  in  the  arts.  Business  profits  are  treated  as  accruing 
solely  from  such  changes.  If  changes  in  the  arts  were  to  cease,  if 
competition  were  to  work  out  its  results  perfectly,  if  prices  were  to 
conform  closely  to  expenses  of  production,  the  managers  of  industry 
would  receive  nothing  but  wages  —  wages  determined  in  the  same 
fashion  as  other  payments  for  labor.  But  in  a  dynamic  state  —  a 
state  of  unstable  equilibrium,  of  transition,  of  advance  —  there  is 
opportunity  for  business  men  to  secure  something  more.  By 
taking  the  lead  in  utilizing  inventions  or  improving  organization 
they  make  extra  gains,  which  last  so  long  as  they  succeed  in  hold- 
ing the  lead.  Business  profits,  so  considered,  are  ever  vanishing, 
ever  reappearing.  They  are  the  stimulus  to  improvement  and 
the  reward  for  improvement,  tending  to  cease  when  once  the 
improvement  is  fully  applied. 

Whether  the  term  "business  profits"  should  be  thus  limited  is 
primarily  a  question  of  phraseology.  The  emphasis  which  this 
view  puts  on  the  relation  between  improvements  and  the  business 


50-§8]  BUSINESS  PROFITS  (Continued)  193 

man's  gains  is  just.  The  large  and  conspicuous  gains  are  in  fact 
associated  almost  invariably  with  advances  in  the  arts,  with  bold- 
ness and  sagacity  in  exploiting  new  enterprises  and  new  methods. 
None  the  less,  this  mode  of  sharply  separating  business  profits  from 
wages  seems  to  me  artificial.  Even  the  routine  conduct  of  estab- 
lished industries  calls  for  judgment  and  administrative  capacity, 
and  so  for  the  exercise  of  the  same  faculties  that  are  more  conspic- 
uously and  more  profitably  exercised  under  conditions  of  rapid 
progress.  To  separate  even  roughly  the  earnings  of  a  successful 
business  man  into  two  parts  —  one  wages,  the  other  "profits"  in 
the  sense  of  gains  from  progress  —  would  seem  to  be  quite  im- 
practicable. Looking  over  the  whole  varied  range  of  earnings 
among  those  engaged  in  the  business  career,  it  is  simplest  to 
regard  them  all  as  returns  for  labor  —  returns  marked  by  many 
peculiarities,  among  which  the  most  striking  are  the  risks  and 
uncertainties,  the  wide  range,  the  high  gains  from  able  pioneering. 

§  8.  Another  view,  in  some  respects  similar,  separates  business 
profits  from  wages  by  considering  as  wages  that  amount  which  the 
individual  would  have  been  paid  if  hired  by  some  one  else.  An  in- 
dependent business  man's  actual  earnings  are  likely  to  exceed  that 
sum;  the  excess  is  business  profits.  Here  emphasis  is  put  on  the 
element  of  risk.  Profits  differ  from  wages  in  that  they  are  the  re- 
sult of  the  assumption  of  risk  and  the  reward  for  that  assumption. 

The  question  here  again  is  one  largely  of  phraseology;  but  un- 
derlying it  is  the  substantial  question  whether  a  satisfactory  line 
of  demarcation  can  be  drawn,  and  "wages"  in  this  sense  really  dis- 
tinguished from  "profits."  Salaried  posts  of  management  have 
a  very  wide  range  —  foremen,  superintendents,  general  managers, 
presidents.  A  process  of  transfer  is  constantly  taking  place  be- 
tween the  salaried  ranks  and  the  independent  business  managers. 
Both  are  affected  by  causes  of  the  same  sort.  A  capable  man  will 
make  large  gross  profits  for  himself,  or  will  be  paid  a  good  salary  if 
others  hire  him.  It  may  even  happen  that  he  will  really  earn 
more  if  hired  by  others;  he  may  have  executive  ability,  yet  lack 
sagacity  and  judgment. 
The  growth  of  large-scale  operations  and  of  corporations  has  in- 


194  THE  DISTRIBUTION  OF  WEALTH  [5(>-§8 

creased  the  employment  of  salaried  men  in  posts  of  leadership,  and 
has  brought  also  an  adjustment  of  their  pay  to  the  qualities  re- 
quired for  leadership.  The  desirability  of  stimulating  salaried 
officials  to  the  best  exercise  of  their  powers  has  led  to  all  sorts  of 
devices.  On  the  continent  of  Europe,  and  especially  in  Germany, 
Qardihmesjdire,  common;  that  is,  a  share  in  the  profits,  additional  to  a 
set  salary.  In  England  and  in  the  United  States  it  is  common  to 
pay  the  managing  head  of  a  great  corporation  a  very  large  salary 
once  for  all,  with  the  tacit  understanding  that  he  must  make  the 
profits  large  enough  to  justify  his  salary.  If  he  would  keep  his 
place,  he  must  make  money  for  his  employers.  This  is  especially 
the  case  in  the  United  States,  where  larger  salaries  are  paid  than  in 
other  countries,  more  power  and  more  responsibility  are  placed  in 
the  hands  of  managers  and  presidents,  and  more  is  expected  from 
them  in  the  way  of  "  results."  The  extraordinary  sums  paid  to  the 
heads  of  great  American  enterprises  —  $50,000  a  year,  $100,000  a 
year,  even  more  —  tho  they  may  stand  in  some  instances  for  mere 
;  nepotism,  in  the  main  represent  an  endeavor  to  get  from  salaried 
'  persons  the  same  keenness  and  ability  which  their  own  immediate 
interest  would  bring  out.  There  is  always  the  possibility  of  the  in- 
dependent exercise  of  such  ability,  and  the  employing  corporations 
must  bid  rewards  on  the  same  scale  as  those  which  it  would  so  yield. 
This  sort  of  de  facto  profit-sharing  explains  why,  even  under  cor- 
porate organization,  private  industry  is  usually  more  efficient,  or 
at  least  has  greater  probabilities  of  progress,  than  public  industry. 
It  has  been  maintained  by  eminent  economists  that  when  once  the 
conduct  of  affairs  is  in  the  hands  of  great  corporations,  the  essential 
advantage  of  private  industry  is  lost;  for  such  corporations,  like 
government,  must  intrust  the  actual  management  to  salaried  offi- 
cials and  therefore  lose  the  spur  of  the  owner's  direct  interest  and 
oversight.  But  governments  cannot  deal  with  officials  with  the 
freedom  of  private  corporations.  They  cannot  pay  salaries  so  high 
or  so  elastic;  sundry  political  forces  make  it  impracticable.  Tho 
there  is  a  glitter  of  fame  from  public  emploj^ment  which  may  enlist 
capable  men  even  with  a  moderate  salary,  the  same  keen  exercise  of 
the  business  faculties  has  rarely  been  stimulated.    For  the  most 


50-§9l  BUSINESS  PROFITS  {Continued)  195 

effective  organization  of  the  forces  of  production,  private  owner- 
ship and  management,  even  with  salaried  managers,  has  unques- 
tionable advantages. 

§  9.  The  tenor  of  the  preceding  discussion  has  been  to  justify 
business  profits  as  due  in  the  main  to  efficiency  and  ability.  The 
community  on  the  whole  gets  an  equivalent  for  the  business  man's 
earnings;  indeed,  must  allow  some  such  earnings  in  order  to  secure 
the  useful  services  rendered.  But  it  is  often  maintained  that  such 
justifiable  earnings  form  only  a  part  of  business  incomes  and  that 
the  total  incomes  much  exceed  the  range  of  the  worth-while  returns. 
The  contention  has  truth;  there  are  illegitimate  as  well  as  legiti- 
mate business  profits.  To  put  it  in  other  words,  a  good  deal  of 
"business"  is  unproductive;  it  serves  not  to  add  to  the  well-being 
of  the  community,  but  to  get  something  away  from  other  people. 

Sometimes  the  case  is  simple.  Gambling  speculation,  such  as 
that  of  the  "bucket  shop,"  is  clearly  unproductive.  Corrupt  con- 
tracts with  government  officials,  such  as  can  be  sublet  by  the  cor- 
ruptor  to  another  who  actually  does  the  work  contracted  for,  are 
in  the  same  class.  The  deliberate  manufacture  and  dishonest 
puffing  of  a  noxious  (or  even  harmless)  "patent  medicine"  is  to  be 
similarly  regarded. 

Commonly,  however,  useful  and  harmful  activity,  legitimate 
and  illegitimate  profits  go  together.  Take  such  a  case  as  a  subsidy 
obtained  by  corruption  and  not  needed  to  promote  the  industrj^  in 
question.  The  business  man's  labor  in  securing  the  subsidy 
serves  to  rob  the  public ;  but  his  labor  in  guiding  the  industry  may 
be  effectively  directed  and  in  its  results  serviceable.  A  consistent 
free  trader  would  say  that  labor  given  to  manipulating  tariff  legis- 
lation in  favor  of  protected  industries  was  the  reverse  of  productive; 
but  the  persons  in  charge  of  the  industries  may  manage  them  well. 
An  employer  may  take  advantage  of  the  helplessness  of  women  and 
children,  of  the  ignorance  and  bargaining  weakness  of  unorganized 
workmen  of  any  sort,  and  may  secure  their  labor  at  less  than  "fair" 
rates;  1  at  the  same  time  he  may  organize  that  labor  with  high 
efficiency. 

»  Compare  Chapters  67  and  58. 


196  THE  DISTRIBUTION  OF  WEALTH  [50-§9 

There  are  numberless  ways  in  which  the  predatory  exercise  of 
business  power  is  mingled  with  activity  that  is  useful.  Such  are 
fraud  and  adulteration  in  the  making  of  goods;  vociferous  tooting 
of  an  article  no  better  or  worse  than  its  rivals,  but  foisted  on  a  gulli:^. 
ble  public  at  a  high  price  by  mendacious  advertising;  cheating  of 
laborers,  thru  "company  stores"  or  in  the  letting  of  company  tene- 
ments, thru  fines  nominally  for  poor  work  (weavers),  thru  over- 
charges (on  miners)  for  materials  and  supplies.  One  of  the  most 
conspicuous  and  far-reaching  forms  of  predatory  business  work  is 
in  the  abuse  of  positions  of  trust  by  directors  and  managers,  often 
closely  associated  with  stock  exchange  speculation.  The  same  man 
may  violate  fiduciary  obligations  and  gamble  with  loaded  dice  on 
the  stock  exchange,  yet  be  a  captain  of  industry.  American  in- 
dustrial history  is  full  of  men  of  this  type,  and  our  great  fortunes 
are  due  in  no  small  measure  to  this  tainted  sort  of  business  activity. 
The  proximate  aim  of  the  business  man  is  to  make  money.  All  is 
fish  that  comes  into  his  net.  Unless  restrained  by  law  or  public 
opinion  or  moral  scruples,  he  will  turn  to  anything  that  promises 
a  liberal  surplus  over  expenses. 

The  restriction  of  business  profits  within  "legitimate"  bounds 
depends  on  two  things:  on  the  one  hand,  full  and  free  competition; 
on  the  other  hand,  the  maintenance  of  competition  on  a  high  plane. 

First,  freedom  of  competition.  Monopoly  profits  are  not  "  ille- 
gitimate" in  the  sense  in  which  those  are  which  result  from  sharp 
practise  and  cheating;  but  they  are  "illegitimate"  in  being  greater 
than  necessary  to  induce  the  exercise  of  the  full  productive  facul- 
ties. Setting  aside  such  cases  as  patents  and  copyrights,  they 
mean  that  the  public  pays  more  than  there  is  any  need  of  paying. 
Shrewd  understanding  of  the  possibilities  of  monopoly  and  skillful 
management  of  monopoly  industries  have  been  great  sources  of 
business  men's  incomes  and  fortunes;  and  this  without  violation  of 
law  or  of  the  proprieties  of  business  life.  The  regulation  of  mo- 
nopoly industries  is  among  the  most  urgent  of  social  problems  and 
is  essential  for  keeping  business  profits  within  the  limits  of  the 
reasonable  or  legitimate. 

The  maintenance  of  a  high  plane  of  competition  depends  partly 


50-§9]  BUSINESS  PROFITS  (Continued)  197 

on  law^  partly  on  public  opinion  and  the  pervading  moral  spirit. 
The  aim  of  the  law  13,^01  should  be,  to  make  men's  relations  with 
each  other  such  as  to  promote  the  general  good  and  to  inhibit  pred- 
atory doings.     This  is  the  basis  of  the  main  provisions  of  the  law 
of  private  property  —  protection  to  property  holders,  punishment 
for  physical  violence  and  robbery,  free  contract,  definition  and  pre- 
vention of  fraud.     As  industrial  conditions  change  and  as  men's 
consciousness  of  common  interest  enlarges,  the  legal  relations  are 
modified.     Slavery,  which  was  part  of  the  established  order  of 
things  not  only  in  ancient  times  but  till  nearly  our  own  day,  is  now 
forbidden  in  all  countries  that  pretend  to  be  civilized.     The  same 
is  true  of  serfdom.     Competition  and  bargaining  between  men, 
and  the  exercise  of  force,  are  not  allowed  to  proceed  on  this  basis 
or  to  this  extreme.     Characteristic  of  our  own  day  is  the  regulation 
of  the  terms  of  dealings  between  employer  and  employed  —  laws 
for  regulating  the  mode  of  paying  wages,  the  hours  of  labor,  mini- 
mum wages,  as  well  as  those  regulating  truck  shops,  "company 
stores,"  and  the  like  possible  sources  of  profit  felt  to  be  illegiti- 
mate.    Pure   food   laws  belong  in  the  same  class.     So  do  the 
improvement  of  legislation  regarding  stock  companies,  the  defini- 
tion and  enforcement  of  the  liabilities  of  directors  and  managers, 
the  prevention  of  swindling  in  promoting  and  floating  corpora- 
tions.    The  aim  thruout  is  to  compel  all  persons,  and  especially 
the  leaders  and  managers  of  industry,  to  conduct  their  operations 
under  such  conditions  as  will  direct  their  energies  to  productive 
and  serviceable  emulation  only. 

PubUc  opinion  is  also  an  important  factor,  both  in  leading  to 
legislation  and  in  adding  to  the  effect  of  legislation.  The  more  the 
anti-social  effects  of  predatory  activity  are  recognized  and  frowned 
upon,  the  more  will  business  energy  turn  to  ways  of  true  service. 
Opinion  among  business  men  themselves  and  in  the  whole  social 
stratum  in  which  they  live  has  been  too  much  dominated  by  mere 
money-making  —  the  worship  of  the  millionaire.  The  more  these 
classes  are  permeated  by  intelligent  insight  as  to  what  business  men 
really  do,  and  high  standards  as  to  what  they  should  do,  the  better 
will  be  the  working  of  the  system  of  private  property  under  the 


198  THE  DISTRIBUTION  OF  WEALTH  [50-§9 

business  man's  guidance.  Widespread  teaching  of  economics, 
such  as  is  carried  on  at  present  in  our  American  universities  and 
colleges  and  schools,  ought  to  contribute  much  to  this  end. 

At  the  best,  however,  there  will  always  be  a  residuum  of  dubious 
business  profits.  So  long  as  there  is  freedom  of  investment  and  of 
contract,  there  will  be  foolish  investors,  hapless  speculators,  short- 
sighted bargainers.  Shrewd  and  strong  persons  will  take  advan- 
tage of  the  ignorant  and  weak.  There  will  always  be  operations  in 
which  it  is  difficult  to  draw  the  line  between  fraud  and  sharp  bar- 
gaining. There  will  always  be  men  to  whom  moral  scruples  mean 
little.  Some  things  of  this  sort  are  the  inevitable  concomitants  of 
the  regime  of  private  property,  which  even  at  its  best  can  be  justi- 
fied only  by  a  balance  of  good  over  evil. 


CHAPTER  51 
Great  Fortunes 

Section  1.  The  development  of  large-scale  production  and  the  growth  of 
numbers  have  been  the  fundamental  causes  of  the  growth  of  great  for- 
tunes, 199  —  Sec.  2.  The  scarcity  of  high  business  ability  explains  great 
fortunes  accumulated  out  of  business  profits,  200  —  Sec.  3.  Influences 
of  a  different  kind  are  urban  site  rent,  the  exploitation  of  rich  natural 
resources,  monopoly  gains.  Unearned  and  fortuitous  fortunes,  202  — 
Sec.  4.  Unearned  gains  are  mingled  inextricably  with  earned,  203  —  Sec. 
5.  Large  fortunes  as  a  spur  to  productive  activity.  The  building  of 
plants  and  of  fortunes  out  of  accruing  profits,  205  —  Sec.  6.  The  need  of 
better  direction  of  economic  and  social  forces,  207. 

§  1.  Great  fortunes  are  among  the  conspicuous  phenomena  of 
modern  times.  In  very  recent  days  they  have  become  porten- 
tously great.  Thru  most  of  the  nineteenth  century,  a  milHonaire 
was  reckoned  the  possessor  of  a  great  property;  but  within  the  last 
generation  multi-millionaires  have  become  common.  Accumu- 
lations of  ten,  twenty,  fifty,  even  hundreds  of  millions  are  familiar. 
True,  standards  have  changed.  Allowance  must  be  made  for  the 
depreciation  of  money;  the  five  millions  of  1920  mean  not  much 
more  than  the  million  of  1890.  Properties  of  all  sizes,  from  small 
thru  moderate  up  to  great,  have  multiplied,  and  the  average  has 
probably  become  larger.  But  when  all  is  said,  the  number  and  the 
size  of  the  exceptionally  large  fortunes  set  us  aghast.  How  ex- 
plain them,  and  what  of  good  or  evil  find  in  them?  It  is  the  first 
of  these  questions,  explanation  and  analysis,  that  will  be  chiefly 
considered  in  the  present  chapter;  the  larger  one  of  weighing  the 
balance  for  and  against  will  engage  our  attention  further  as  we  pro- 
ceed. ^  And  much  of  what  is  now  said  must  be  in  the  nature  of 
summary  and  amplification  of  the  preceding  discussion  of  distri- 
bution at  large. 

Fundamental  among  the  causes  of  great  fortunes  is  the  develop- 

1  See  Chapter  55,  on  Inequality,  and  Chapters  66,  67,  on  Socialism. 

199 


200  THE  DISTRIBUTION  OF  WEALTH  [51^§2 

merit  of  large-scale  production.  Manufacturing,  trading,  trans- 
portation, have  been  conducted  since  the  Industrial  Revolution  on 
a  scale  never  before  known  and  with  opportunities  for  profit  never 
before  known.  Hardly  less  important  has  been  the  growth  of 
numbers.  In  the  civilized  countries  population  took  a  great  burst 
during  the  nineteenth  century.  Unprecedented  numbers  of  people 
were  supplied  with  steadily  greater  abundance  of  goods,  and  the 
capable  or  fortunate  leaders  and  innovators  took  their  toll.  These 
general  movements,  so  familiar  and  long-continued  as  to  be  taken 
usually  as  matters  of  course,  underlay  the  growth  of  the  great 
fortunes. 

Following  the  scheme  of  distribution  which  has  been  elaborated 
in  the  preceding  chapters,  the  causes  of  fortunes  may  be  classified 
more  in  detail  as  derived  from  one  or  the  other  of  the  follow- 
ing sources:  business  profits;  economic  rent;  monopoly  gains; 
illegitimate  or  predatory  profits.  Each  of  these  may  be  taken 
up  in  turn. 

§  2.  Simplest  of  all  is  the  case  where  a  fortune  has  been  accumu- 
lated out  of  business  profits.  It  is  a  common  case.  Every  day  we 
see  large  profits  and  large  accumulations  in  the  strictly  competi- 
tive businesses.  Such  are  any  number  of  manufacturing  industries 
—  shoemaking,  textiles,  pots  and  pans,  collars  and  neckties. 
Sometimes  the  making  of  an  apparently  insignificant  article,  a 
small  specialty,  becomes  the  basis  of  a  fortune :  when  the  article  can 
be  sold  to  tens  of  millions  of  customers  there  is  the  opportunity  for 
large  turnover,  for  the  economies  of  large-scale  production,  for 
profits  great  in  the  aggregate  tho  small  on  each  item.  Mercantile 
operations  belong  in  the  same  class.  The  modern  jobbing  firm  can 
cover  a  vast  territory  and  reach  an  immense  number  of  people. 
Often  merchandising  has  been  supplemented  with  manufacturing. 
A  distributing  business,  once  established  with  its  circle  of  habitual 
customers,  sets  up  a  manufacturing  adjunct  and  combines  the  prof- 
its of  the  two  operations.  Some  older  fortunes  got  together  in 
this  sort  of  combination  are  supposed  by  their  inheritors  and  pres- 
ent possessors  to  have  a  reputable  flavor  not  attaching  to  properties 
perhaps  of  larger  size  but  of  new-fangled  origin.    Banking  is  an- 


51-§2]  GREAT  FORTUNES  201 

other  field  of  the  kind  often  regarded  as  more  distinguished.  Here 
too  there  are  pure  banking  firms,  and  on  the  other  hand  some  that 
have  Hnked  their  fortunes  intimately  with  manufacturing  or  min- 
ing ventures. 

The  characteristic  features  of  fortunes  of  this  sort  are  that  they 
are  secured  under  the  conditions  of  open  competition,  that  they 
are  essentially  due  to  ability  and  efficiency  on  the  part  of  the  found- 
ers, that  they  may  be  fairly  said  to  be  earned  No  restraint  on 
competitors,  no  monopoly  privilege  attaches  to  them.  The  field  is 
free  for  all;  there  is  an  unending  procession  of  new  entrants,  con- 
stant withdrawal  of  fortunes,  constant  making  of  new  ones.  True, 
when  once  a  large  concern  has  been  set  going,  it  keeps  on  for  a  time 
by  mere  momentum.  Prestige,  established  connection,  brands, 
trademarks,  enable  profits  to  roll  up  thru  an  apparently  automatic 
process.  This  is  particularly  the  case,  as  we  have  seen,  with  bank- 
ing operations;  it  is  hardly  less  so  with  manufacturing  enterprises. 
But  in  the  end  the  master  mind  must  be  there;  if  not,  the  business 
begins  to  run  down.  The  founder  and  owner  may  run  off  for  weeks 
and  months,  and  things  go  on  as  well  without  him.  But  the  very 
fact  that  they  do  so  shows  how  well  he  has  built  and  organized. 
This  sort  of  care-free  management  never  is  possible  in  a  budding 
enterprise.  And  the  death  or  definitive  retirement  of  the  founder 
sooner  or  later  leads  either  to  decay  of  the  business  or  to  the  passing 
of  control  to  new  and  again  capable  hands.  It  is  the  scarcity  of 
high  business  ability  that  explains  the  fortunes;  and  it  is  this  which, 
under  the  canons  and  presumptions  of  private  property,  justifies 
them.  Under  the  existing  economic  and  social  regime,  the  purpose 
and  the  trend  are  that  reward  shall  be  in  proportion  to  efficiency; 
and  the  ground  of  justification  for  a  high  reward  is  that  it  stimu- 
lates efficiency.  Certain  it  is  that  the  bait  of  a  fortune  has  been 
a  tremendous  incitement  to  enterprise,  energy,  persistence,  the 
manifold  improvements  in  the  arts  which  have  made  the  possi- 
bilities of  production  what  they  are  in  the  modern  world.  Whatever 
be  one's  belief  on  the  need  of  this  sort  of  motivation  for  the  future 
no  sober  observer,  no  thoughtful  socialist,  can  question  that  it  has 
been  powerful  in  the  past* 


A 


202  THE  DISTRIBUTION  OF  WEALTH  [51-§3 

§  3.  Questions  in  many  ways  different  are  raised  by  the  for- 
tunes accumulated  under  non-competitive  conditions. 

Such  for  example  are  those  derived  from  rent  in  its  most  con- 
spicuous form  —  urban  site  rent.  Reference  has  already  been 
made  to  the  extraordinary  windfalls  which  some  ducal  families  in 
England  pocketed  when  leases  of  London  sites  fell  in.  Not  dis- 
similar have  been  the  fortunes  of  such  American  families  as  the 
Astors,  who  also  profited  marvellously  by  the  growth  of  urban 
population  and  the  accretion  of  urban  rent.  In  most  countries, 
certainly  in  the  United  States,  this  particular  form  of  gain  has  been 
diffused  thru  many  hands;  yet  in  plenty  of  cases  it  has  left  great 
amounts  in  the  possession  of  individuals  and  families. 

Analogous,  yet  not  quite  the  same,  have  been  the  fortunes  resting 
on  such  natural  resources  as  ores,  forests,  oil.  They  are  not  quite 
the  same  because  here  we  have  more  of  the  elements  of  invest- 
ment, deliberate  development,  enterprise,  risk.  Often  it  would  be 
difficult  to  say  precisely  how  much  of  a  fortune  derived  from  these 
sources  is  earned,  how  much  unearned.  But  of  the  latter  sort  there 
have  been  plenty  enough.  Above  all,  the  volume  of  the  gains  has 
been  enlarged  by  the  exploitation  of  rich  natural  resources.  Un- 
expected growth  of  population,  unexpected  improvement  of  trans- 
portation, unexpected  advances  in  the  arts  have  caused  mines  and 
forests  to  yield  surpluses  of  gain  far  beyond  what  the  early  pro- 
prietors could  have  expected  and  far  beyond  what  could  by  the 
utmost  stretch  be  imagined  as  necessary  to  induce  their  full  de- 
velopment. 

Next  among  the  fortunes  due  to  non-competitive  conditions  are 
those  from  monopoly.  So  far  as  resting  on  a  patent  or  like  legal 
protection,  they  may  be  said  to  be  earned.  The  law  here  ex- 
presses the  deliberate  conclusion  of  the  community  that  prizes  are 
needed  to  evoke  invention.  But  the  control  of  great  industries 
which  has  resulted  from  the  sudden  growth  of  large-scale  produc- 
tion and  the  concentration  of  an  entire  industry  in  a  few  huge  es- 
tablishments, perhaps  a  single  one,  has  given  rise  to  surpluses  far 
beyond  those  of  competitive  businesses.  In  essentials,  the  public 
service  industries,  so  called,  belong  in  this  class;  it  is  the  technical 


51-§4]  GREAT  FORTUNES  203 

advances  which  have  led  to  operation  on  the  great  scale  in  rail- 
ways, street  railways,  gas,  electricity,  and  so  to  single-handed  con- 
trol and  to  monopoly  gains. 

In  a  third  class,  a  sort  of  omnium  gatherum,  may  be  placed  a 
series  of  fortunes  having  varying  degrees  of  demerit  but  all  alike  in 
that  there  is  no  connection,  or  but  the  remotest,  with  operations 
useful  to  the  community.  Sometimes  there  is  plain  violation  of 
existing  law,  as  when  great  tracts  of  timber  land  are  filched  from  the 
community  by  base  fraud  or  forgery.  ]\Iore  often,  in  cases  of  the 
fraudulent  kind,  there  is  nominal  compliance  with  the  law,  but 
violation  of  its  spirit  and  connivance  with  semi-corrupt  officials. 
Tainted  in  the  same  way  by  unmistakable  fraud  are  the  fortunes 
secured  by  stock-jobbing  speculators  who  gamble  with  loaded  dice: 
insiders  in  a  great  corporation  who  play  the  game  against  the  out- 
side public  in  violation  of  fiduciary  obligations.  Here,  as  in  the 
case  of  timber  thieves,  there  is  plain  violation  of  law,  no  pretense 
that  the  canons  of  the  existing  system  have  been  observed.  Specu- 
lative dealings  not  of  this  tainted  sort  have  already  been  consid- 
ered ;i  they  are  not  wholly  devoid  of  advantage  to  the  public,  but 
the  price  paid  by  the  public  must  be  admitted  to  be  high  when  the 
twists  and  turns  of  trade  land  a  million  or  millions  in  the  hands  of 
a  daring  adventurer.  Again  fortuitous  gains  like  those  which  are 
bred  by  a  great  war,  are  not  to  be  readily  associated  with  activity 
that  promotes  the  general  good.  Some  ventures  of  peace  which 
rest  on  the  deliberate  use  of  mendacious  advertising  belong  in  the 
same  dubious  class. 

§  4.  The  puzzling  thing  is  that  thru  their  whole  range  the  un- 
earned gains  are  mingled  inextricably  with  those  that  are  earned. 
Business  profits  of  the  sort  that  may  be  termed  legitimate  and  even 
honorable  are  intermingled  with  the  doubtful  and  disreputable 
gains.  It  has  been  remarked  in  the  preceding  chapter  that  men 
who  are  extraordinarily  different  in  other  respects  may  be  alike  in 
possessing  high  business  capacity.  A  man  may  be  a  land-swindler 
or  stock-speculating  railway  manager,  and  none  the  less  have  the 
business  virtues  —  enterprise,  vigor,  judgment,  organizing  power. 

1  See  Chapter  11,  §§  1,  5. 


204  THE  DISTRIBUTION  OF  WEALTH  [51-§4 

And  even  where  there  can  be  no  reproach  on  the  score  of  lack  of 
probity,  there  are  still  gains  not  to  be  described  once  for  all  as  earn- 
ings. Such  are  those  arising  from  the  seizure  of  natural  resources 
and  of  unearned  increments.  The  same  qualities  that  make  a  man 
a  good  business  leader  make  him  a  good  business  chooser.  He  has 
a  keen  eye  for  the  economic  possibilities.  He  judges  shrewdly  of 
mines,  timber  tracts,  oil,  urban  and  surburban  sites.  Social  insti- 
tutions as  they  stand  invite  him  to  pick  up  the  most  he  can  find  — 
the  law,  the  accepted  canons  of  conduct,  the  pervading  attitude 
toward  money-getting.  At  the  same  time,  toward  making  the 
best  of  that  which  nature  offers,  his  skill  and  management  are  es- 
sential. How  discern  w^hat  is  ascribable  to  his  judgment  and  his 
management,  what  to  nature's  gift?  It  is  easy  to  see  that  often 
the  final  fortune  is  greater  than  can  be  reasonably  ascribed  to  the 
special  effectiveness  of  the  man's  labor;  but  it  is  immensely  difiicult 
to  draw  the  line  in  a  given  case. 

Another  circumstance  promotes  gathering  accumulations  and 
/gives  to  him  who  hath.  The  prospering  business  man  can  wait. 
Midway  in  his  career,  when  he  has  reached  the  stage  of  large  means 
and  large  credit,  he  looks  about  for  ventures  outside  of  his  first  and 
more  immediate  business.  He  foresees  what  the  future  will  bring; 
he  buys  cheap  lands,  cheap  mines,  cheap  stocks;  and  then  —  to  use 
the  jargon  of  the  street  —  he  sits  on  them.  In  time  his  foresight 
will  be  justified  by  the  event;  not  without  fail, for  there  are  risks  and 
disappointments  in  these  ventures;  but  the  far-seeing  and  discrimi- 
nating in  the  end  reap  ample  return  for  their  patience  and  acumen. 
Nothing  so  well  illustrates  all  the  complications  of  fortune  build- 
ing as  the  history  of  American  railways  during  the  nineteenth 
century.  Here  we  see  able  management,  brilliant  enterprise, 
speculative  ventures,  shrewd  pickings,  dishonest  filchings.  A  great 
continent  was  opened,  an  unexampled  sj'stem  of  transportation 
created.  Extraordinary  natural  resources  were  uncovered;  railway 
units  of  prodigious  size  built  up;  railway  management  of  a  special 
type  and  special  effectiveness  developed ;  consolidation  was  carried 
out  and  immense  power,  approaching  monopoly,  acquired  by  the 
railway  kings;  through  it  all,  increasing  speculation  on  the  stock 


51-§5]  GREAT  FORTUNES  205 

exchange,  gambling  by  the  multitude,  shrewd  purchases  at  bargain 
prices  by  the  able  and  fortunate  few,  more  or  less  of  inside  manage- 
ment and  deliberate  wrecking.  The  same  round  —  not  quite  the 
same,  but  of  the  same  kind  —  was  repeated  in  the  late  growth  of 
the  great  industrial  combinations  and  trusts.  A  like  extraordinary 
jumble  and  a  like  climax —  an  array  of  conspicuous  fortunes. 

§  5.  What  grounds  there  are  for  justifying  large  fortunes  has 
been  sufficiently  indicated  in  the  preceding  pages.  These  prizes 
are  a  potent  spur  to  productive  activity;  they  promote  new  enter- 
prises and  improvements  in  the  arts,  lead  to  the  increase  of  capital. 
Money-making  is  part  of  the  individualist  system.  Such  as  that 
system  is,  good  or  bad  on  the  whole,  likely  to  endure  or  certain 
to  disappear,  it  stands;  and  in  it  and  in  its  forward  move- 
ment the  potentiality  of  fortune-building  is  imbedded.  Great 
advances  in  the  arts  of  production  are  to  the  common  interest. 
The  public  has  been  unable  to  achieve  them  for  itself  —  why,  it 
concerns  us  not  here  to  inquire  further.  So  long  as  reliance  is 
placed  on  private  initiative  and  individual  gain,  wide  disparities 
in  earnings  will  persist,  and  great  fortunes  will  emerge.  And,  as 
has  been  more  than  once  said  in  these  pages,  the  accumulation  of 
savings  and  the  increase  of  capital  are  promoted  by  some  measure 
of  inequality.  So  great  a  degree  of  inequality  as  exists,  so  many 
and  so  great  fortunes,  are  not  indeed  indispensable.  But  the  plain 
fact  must  be  faced  that  without  marked  inequalities  in  earnings 
and  possessions  the  material  progress  of  the  modern  world  would 
not  have  taken  place;  nor  is  there  any  clear  indication  that  this 
condition  of  progress  can  be  dispensed  with  in  the  future. 

The  building-up  of  great  plants  and  great  enterprises  out  of  the 
net  gains  of  a  business  is  one  phase  of  this  matter  of  the  increase  of 
capital  in  connection  with  large  fortunes;  and  it  illustrates  the 
complexities  of  the  whole  problem. 

The  stout  defenders  of  things  as  they  are  often  depict  this 
process  as  if  the  owners  of  the  properties  were  not  getting  their 
profits  at  all  —  as  if  they  never  got  them.  It  is  often  suggested, 
too,  that  the  procedure  is  really  an  altruistic  one:  the  surplus  is 
set  aside  for  the  public  benefit.     And  there  is  a  modicum  of  truth 


206  THE  DISTRIBUTION  OF  WEALTH  [51-§5 

in  all  this.  The  owners  in  fact  are  not  getting  the  income,  at  least 
not  for  the  time  being.  They  are  setting  aside  part  of  a  potential 
income  and  saving  it,  not  enjoying  it.  There  has  been  occasional 
debate  among  economists  whether  savings  are  income,  and  the 
sound  conclusion  is  that  fundamentally  they  are  not.  In  the  last 
analysis  income  is  what  is  enjoyed  or  consumed;  that  which  is  set 
aside  and  invested  is  no  part  of  current  income.  Further,  it  is 
true  that  a  public  benefit  accrues  from  investment.  All  invest- 
ment in  capital  is  to  the  public  advantage;  the  building-up  of  the 
community's  material  outfit  promotes  the  common  good.  It  may  be 
said,  too,  that  the  building-up  of  plant  out  of  accruing  profits  is  in  a 
special  sense  advantageous.  In  this  way  only  is  the  growth  of  many 
a  great  productive  unit  possible.  New  and  untried  industries,  en- 
largements and  technical  advances  of  a  novel  kind,  take  place  most 
commonly  in  just  this  way.  Funds  for  them  cannot  be  readily 
secured  by  public  subscription.  "  Outside ' '  investment  is  attracted 
only  after  some  proof  of  success  has  already  been  given.  The 
process  of  putting  earnings  back  into  the  business  does  mean  that 
great  efficient  establishments  are  enlarged  and  the  cheap  and 
abundant  production  of  goods  promoted. 

But  the  eventual  outcome  is  the  emergence  of  a  fortune,  per- 
haps a  colossal  fortune.  Eventually  the  owners  do  get  the  benefit 
of  their  earnings.  Talk  about  their  altruism  may  be  swept  aside. 
The  plant  at  last  is  capitalized  for  all  that  has  been  put  into  it,  very 
likely  for  more ;  the  melon  is  cut.  Often  it  is  the  descendants  of  the 
founders  who  reap  the  final  harvest.  It  boots.then  little  to  inquire 
just  in  what  way  the  saved  earnings  and  surpluses  of  a  past  gener- 
ation were  secured, —  whether  by  sheer  ability  and  efficiency,  or  by 
such  qualities  mingled  with  intrigue,  trickery,  perhaps  dishonesty; 
how  far  due  to  deliberate  planning,  how  far  the  mere  result  of  grow- 
ing population  and  wealth.  It  is  impracticable  to  make  a  separa- 
tion, and  it  is  too  late  to  undo  thru  any  sort  of  expropriation  the 
laches  of  the  past.  There  the  fortune  stands,  a  warning  that  a  repe- 
tition of  this  round  must  be  guarded  against  for  the  future,  and  a 
problem  of  its  own  for  the  present;  at  the  moment,  nevertheless,  a 
firm  part  of  the  social  structure. 


51-§6]  GREAT  FORTUNES  207 

§  6.  The  objectionable  aspects  of  large  fortunes  are  more  obvious 
than  their  causes  and  the  possible  grounds  for  justifying  them. 
The  evils  center  about  inequality,  and  most  of  all  about  that  sort  of 
inequality,  the  result  of  the  institution  of  inheritance,  by  which  a 
few  live  in  conspicuous  luxury  and  idleness.  Princelings  and  ducal 
personages  were  thought  by  the  protagonists  of  the  modern  indus- 
trial system  to  be  peculiar  to  the  outworn  system  of  feudalism  and 
privilege.  Precisely  such  puppets  emerge  under  the  "simple  and 
obvious  system"  of  natural  liberty.  No  stretch  of  psychological 
analysis  concerning  the  spur  of  ambition,  the  spice  of  constant 
emulation,  the  staleness  and  flatness  of  uniformity,  can  prevail 
against  the  universal  conviction  that  the  maximum  of  human  hap- 
piness is  not  promoted  by  great,  glaring,  permanent  inequality. 
The  readiest  immediate  means  of  meeting  this  situation  is  heavy 
taxation  on  the  inheritance  of  great  fortunes:  the  carving  out  of 
large  slices  for  the  public  as  transmission  takes  place  on  death. 
But  this  is  not  an  entirely  simple  matter.  It  raises  one  of  the  many 
problems  concerning  the  working  of  the  institution  of  property.  Of 
these  more  will  be  said  shortly  ;^  for  the  present,  we  are  concerned 
chiefly  with  the  bare  analysis  of  the  situation.  Great  fortunes  and 
their  causes  illustrate  better  than  any  other  single  aspect  of  modern 
life  how  disordered  is  its  movement,  how  unconscious  it  is  of  any 
goal,  how  disturbing  are  its  phenomena.  Nothing  raises  more 
difficult  questions,  nothing  shows  more  plainly  the  need  of  girding 
ourselves  for  a  better  direction  of  the  economic  and  social  forces. 

1  See  Chapter  55. 


CHAPTER  52 

The  General  Level  of  Wages 

Section  1.  The  fundamental  question  on  the  general  level  of  wages  is  raised 
by  the  case  of  hired  laborers,  208  —  Sec.  2.  The  notion  that  lavish 
expenditure  creates  demand  for  labor  and  makes  wages  high.  Conse- 
quences of  investment  as  compared  with  "expenditure,"  209  —  Sec.  3. 
The  fallacy  of  "making  work."  Why  hired  laborers  universally  desire 
that  employment  should  be  created  and  dislike  labor-saving  appUances, 
210  —  Sec.  4.  The  theory  of  the  specific  product  of  labor  as  determining 
wages,  213  —  Sec.  5.  Wages  depend  on  the  discounted  marginal  product 
of  labor.  Explanation  of  "margin"  and  of  "discount."  Advances  to 
laborers,  214  —  Sec.  6.  Some  qualifications.  (1)  The  current  rate  of 
interest  is  assumed  to  be  settled  hy  time  preference;  otherwise  there  is 
reasoning  in  a  circle.  (2)  A  broad  competitive  margin  is  assumed,  other- 
wise there  is  no  settlement  either  of  interest  or  of  wages,  216  —  Sec.  7. 
The  mechanism  of  advances  to  laborers,  the  flow  of  real  income  into  their 
hands,  the  reservoir  of  existing  supplies,  the  replacement  of  what  is 
advanced,  218  —  Sec.  8.  With  the  increasing  complexity  of  production 
interest  tends  to  be  a  larger  part;  wages  a  smaller  part,  of  the  total  income 
of  society,  221  —  Sec.  9.  The  theory  of  general  wages,  tho  it  seems  remote 
from  the  problem  of  real  life,  is  of  high  importance  for  the  great  social 
questions,  222. 

§  1.   Wages  are  so  immensely  varied  that  it  may  seem  idle  to 
aim  at  any  generalizations  regarding  them.     They  range  from  the 


earnings  of  the  highly  paid  business  manager  or  professional  man 
to  those  of  the  mechanic  and  common  laborer.  Notjess  varied  are 
the  methods  by  which  those  earnings  are  got.  The  simplest 
method,  and  that  which  we  most  commonly  associate  with  the  term 
"wages,"  is  the  payment  of  stipulated  amounts  by  an  employer. 
The  earnings  of  the  independent  worker  —  whether  he  be  business 
man,  lawyer,  farmer,  craftsman  —  are  almost  always  more  irregular, 
and  almost  always  include  some  elements  (in  the  way  of  interest  or 
rent)  which  are  not  return  for  labor.  Still  different  is  the  position 
of  the  metayer  tenant  and  of  the  fisherman  working  for  a  share  in 
the  catch. 

208 


52-§2]  THE  GENERAL  LEVEL  OF  WAGES  209 

It  will  be  best  to  concentrate  attention  on  the  simplest  case  — 
that  of  hired  laborers,  paid  once  for  all  by  the  day  or  by  the  piece. 
This  mode  of  remuneration  brings  up  the  "wages  question"  in  the 
narrower  sense.  It  is  the  mode  of  remuneration  becoming  more 
and  more  common  with  the  spread  of  large-scale  production.  It 
raises  the  fundamental  question  concerning  the  causes  determin- 
ing the  general  range  of  wages. 

§  2.  First,  somejerroneDUs  notions  may  be  disposed  of.  Oncof 
these  is  that  lavish  expenditure  creates  a  demand  for  labor,  and  is 
good  for  laborers.  On  this  ground  luxury  and  extravagance  of  all 
sorts  have  been  commended,  expressly  or  by  implication.  The  fal- 
lacy which  underlies  it  has  often  been  pointed  out.  That  which  is 
saved  is  spent  quite  as  much  as  that  which  is  not  saved.  Most  peo- 
ple think  only  of  the  first  step  in  the  process  of  saving  and  invest- 
ment —  as  if  it  were  merely  a  matter  of  putting  money  by,  and 
leaving  it  in  a  bank  or  other  safe  place.  The  money  which  is  put  by 
is  turned  over  to  some  one  else,  usually  to  a  person  engaged  in  oper- 
ations of  production.  It  is  simply  spent  in  a  different  way.  It 
leads  equally  to  the  employment  of  labor,  and  is  equally  the  means 
by  which  the  employers  and  workmen  get  command  of  the  things 
they  wish  to  buy.  The  difference  between  expenditure  on 
luxuries  and  investment  is  merely  a  difference  in  the  direction  in 
which,  labor  shall  be  employed. 

That  difference  in  direction,  of  course,  may  have  permanent 
consequences.  It  may  mean  that  some  sorts  of  labor  are  more 
in  demand,  others  are  less  in  demand.  If  we  imagine  that  the 
laborers  hired  in  constructing  mansions  or  pleasure  yachts,  or  in 
prodigal  entertainment,  belong  to  one  non-competing  group,  and 
that  those  hired  in  building  factories  or  railways  belong  to  another, 
a  change  in  the  direction  of  demand  may  permanently  influence 
relative  wages.  But  such  a  permanent  change  is  very  improbable. 
Temporary  changes  in  wages,  on  the  other  hand,  caused  by  shifts 
in  the  demand  for  labor  engaged  in  various  directions,  are  not  only 
possible,  but  are  among  the  most  common  of  economic  phenom- 
ena. These  shifts  are  quite  as  likely  to  be  from  one  sort  of 
immediate  e^jpenditure  to  another  sort  —  from  bicycles  to  automo- 


210  THE  DISTRIBUTION  OF  WEALTH  [52-§3 

biles  —  as  from  such  expenditure  to  saving  and  investment.  They 
do  not  influence  for  better  or  worse  the  total  demand  for  labor. 

Looking  not  to  the  immediate  effects,  but  to  the  eventual  results, 
of  investments  as  compared  with  "expenditure,"  we  may  agree 
with  the  older  economists  who  maintained  that  saving  was  advan- 
tageous to  laborers.  Investment  uSTially  leads  to  the  increase  and 
Improvement  in  the  apparatus  of  production  —  the  tools,  machin- 
ery, factories,  materials.  The  eventual  result  is  the  production  of 
more  consumable  commodities  than  would  otherwise  be  procured. 
Were  tools  not  successful  in  bringing  about  this  result,  they  would 
not  prove  profitable  and  would  not  be  made.  The  consumable 
commodities  presumably  are,  in  greater  or  less  part,  such  as  the 
laborers  themselves  buy;  and  by  their  greater  abundance  and  cheap- 
ness the  laborers  gain.  On  this  ground  it  may  be  said  that  invest- 
ment as  compared  with  immediate  expenditure  is  better  for  the 
laborers  as  a  whole.  In  the  first  stages  they  are  neither  injured 
nor  benefited;  in  the  end  they  are  likely  to  be  benefited. 

§  3.  Still  another  notion,  cropping  out  continually  in  all  sorts  of 
forms,  is  that  it  is  advantageous  that  employment  be  created  or 
maintained  for  laborers.  A  great  fire  or  a  great  war  is  sometimes 
thought  a  godsend  to  the  workingman.  A  heavy  snowstorm  is  wel- 
comed because  it  brings  employment.  And,  conversely,  improve- 
ments and  labor-saving  machinery  are  thought  to  diminish  em- 
ployment; do  they  not  dispense  with  the  services  of  many  work- 
men? Laborers  themselves  are  almost  invariably  desirous  of 
"making  work."  They  believe  that  a  more  difficult  way  of  doing 
a  thing,  one  that  calls  for  more  labor,  is  better  for  those  who  have  to 
sell  the  labor.  Few  persons  maintain  views  of  this  sort  deliberately 
and  steadily;  yet  there  are  few  who  do  not  sometimes  fall  into  ways 
of  speech  that  imply  them. 

It  is  obvious  that  mankind  cannot  be  made  better  off  by  causing 
work  to  be  less  productive,  or  by  requiring  additional  labor  for  ac- 
complishing the  same  thing.  If  there  were  constant  snowstorms 
and  a  need  of  giving  unremitting  labor  to  snow-shoveling,  so  much 
less  labor  could  be  given  to  operations  bringing  positive  and  sub- 
stantial results.    The  labor  which  is  given  to  replacing  wealth  de- 


52-§3]  THE  GENERAL  LEVEL  OF  WAGES  211 

stroyed  by  fire  or  war  might  have  been  given  to  the  creation  of  so 
much  new  wealth.  The  abundance  of  consumable  commodities, 
on  which  all  material  prosperity  is  bottomed,  evidently  depends 
on  getting  as  much  done  as  possible  with  as  little  labor  as  possible. 
How  then  can  people  talk  so  persistently  about  the  advantages  of 
creating  employment? 

The  explanation  is  to  be  found  partly  in  the  consequences  of  the 
division  of  labor,  bringing  as  it  does  a  difference  between  the 
causes  acting  on  general  prosperity  and  those  acting  on  particular 
groups;  partly  in  the  necessitous  position  of  most  hired  laborers. 

Where  there  is  no  division  of  labor  and  no  exchange,  this  notion 
can  never  arise.  No  farmer  working  for  himself  will  think  for  a 
moment  that  it  Is  for  his  advantage  to  choose  that  way  of  doing  a 
thing  which  involves  most  labor.  He  will  welcome  every  labor- 
saving  appliance.  But  when  there  is  division  of  labor  and  ex-' 
change,  every  individual's  earnings  depend  not  only  on  the  quan- 
tity of  things  which  his  labor  produces,  but  on  the  terms  of  sale  for 
those  things.  It  may  be  to  his  individual  advantage,  and  still 
more  often  may  seem  to  his  advantage,  to  produce  less  and  sell  for 
more ;  even  tho  it  be  obvious  that  if  all  men  did  this,  all  would  be 
worse  off.  And  similarly  it  may  be  to  his  advantage  that  his  labor 
should  be  more  in  demand,  even  tho  the  cause  be  something  that 
lessens  the  total  income  of  society.  A  great  hailstorm  with  many 
broken  windows  means  a  demand  for  glaziers.  If  this  sort  of  de- 
struction went  on  all  the  time,  the  number  of  glaziers  in  the  com- 
munity would  accommodate  itself  to  the  situation.  More  persons 
would  do  this  sort  of  work,  and  less  persons  would  be  available  for 
doing  other  things.  The  glaziers  themselves  would  not  benefit  in 
the  end ;  unless  indeed  they  happened  to  constitute  a  non-compet- 
ing group  and  so  to  possess  a  labor  monopoly.  But  for  a  time  those 
glaziers  who  happened  to  be  on  hand,  ready  to  do  this  particular 
sort  of  work,  would  gain  by  an  increase  of  demand  for  their 
services.  Most  men  see  only  immediate  effects  and  draw  general 
conclusions  from  temporary  phenomena.  They  suppose,  or  talk  as 
if  they  supposed,  that  what  is  good  for  a  limited  number  of  work- 
men for  a  short  time  is  good  for  all  workmen  for  an  indefinite  time. 


212  THE  DISTRIBUTION  OF  WEALTH  [52-§3 

Most  important  of  all,  however,  in  explaining  the  common  atti- 
tude of  workmen  is  their  position  as  hired  laborers.  For  them  it  is 
of  first  importance  that  they  be  employed.  Where  permanence  of 
employment  is  assured,  they  are  rarely  opposed  to  labor-saving 
appliances.  But  when  they  are  engaged  on  a  given  job,  and  will  no 
longer  be  wanted  when  that  job  is  done,  they  wish  that  it  shall  con- 
tinue. No  doubt,  in  the  interest  of  general  efficiency  in  production, 
it  is  desirable  that  this  job  shall  be  disposed  of  as  quickly  as  possi- 
ble and  that  their  labor  shall  then  be  turned  to  something  else.  But 
where  that  something  else  is  not  immediately  in  sight,  it  is  natural 
that  they  should  wish  the  existing  employment  to  hold  out  as  long 
as  possible.  It  is  the  difficulty  of  transition  to  another  employ- 
ment that  explains  the  desire  to  make  work,  or  to  keep  work  going. 
It  is  that  same  difficulty  of  transition  that  goes  far  toward  explaining 
the  disadvantages  of  the  workman  in  bargaining  with  his  employer, 
and  constitutes  one  of  the  main  justifications  of  labor  unions.^ 

The  situation  is  essentially  the  same  where  the  workmen  of  a 
given  trade  are  confronted  with  some  improvement  that  causes 
labor  to  be  more  productive.  For  them,  it  may  mean  less  employ- 
ment and  the  necessity  of  either  accepting  less  wages  or  moving  to 
some  other  occupation.  The  inventions  of  the  linotype  and  the 
typesetting  machine  greatly  increased  the  output  of  labor  in  print- 
ing. They  diminished  also  —  for  a  time  at  least  —  the  demand  for 
compositors.  Some  of  the  older  members  of  the  trade  who  could 
neither  operate  the  new  machines  nor  turn  to  anything  else  found 
themselves  in  a  sad  position. 

It  happened  in  the  printing  trade,  and  indeed  has  often  hap- 
pened in  other  cases,  that  the  total  number  of  men  employed  in  it, 
and  so  the  demand  for  labor  in  its  former  employment,  did  not  be- 
come less  at  all,  or  less  for  a  short  time  only.  The  cheapening  of  a 
commodity  may  mean  an  increase  in  the  market  demand  such  that 
the  total  sum  spent  on  it  may  be  as  great  as  before,  even  greater 
than  before.2    With  lower  prices  for  books  and  newspapers,  it  is 

1  See  below,  Chapter  57,  on  Labor  Unions. 

2  That  is,  in  technical  language,  the  elasticity  of  demand  may  be  greater  than 
unity.    See  Chapter  10,  §  2. 


52-§4]  THE  GENERAL  LEVEL  OF  WAGES  213 

entirely  possible  that  many  more  will  be  bought,  and  more  persons, 
not  less,  employed  in  printing  them.  It  has  been  maintained  that 
such  is  the  common  effect  of  inventions  and  labor-saving  appliances. 
But  this  is  quite  too  optimistic  a  view.  The  outcome  evidently 
depends  on  the  elasticity  of  demand  for  the  particular  commodity. 
Only  when,  with  a  lowering  of  price,  demand  extends  very  rapidly, 
is  it  likely  that  there  will  be  no  displacement  of  labor. 

§  4.   Very  different  in  character  from  the  confused  and  fallacious 
notions  just  discussed  is  the  view,  held  by  many  able  economists  of 
our  day,  that  the  fundamental  determinant  of  wages  is  the  specific    V<(v 
product  of  labor.    As  between  labor  and  capital,  each  is  supposed 
to  contribute  a  share  of  its  own  to  the  output.     There  is  a  specific     ^ 
product  ascribable  to  capital,  and  a  specific  product  ascribable  to 
labor.     Each  tends,  under  competitive  conditions,  to  get  as  reward    '**-^ 
what  it  adds  to  the  product.     It  is  a  natural  corollary  that  such 
distribution  of  rewards  is  in  accord  with  justice;  tho  this  follows  only 
if  it  be  granted  —  by  no  means  a  matter  of  course  —  that  distribu- 
tion in  proportion  to  efficiency  is  always  just.^ 

To  enter  on  a  detailed  discussion  of  the  reasoning  which  has  been 
applied  to  this  mode  of  treating  wages  would  pass  the  bounds  of  the 
present  book.  The  main  ground  on  which  it  is  open  to  question 
has  already  been  indicated.^  It  assumes  a  separate  productivity 
of  capital  as  well  as  labor.  But  capital  is  itself  made  by  labor;  it 
represents  a  stage  in  the  applications  of  labor.  If  one  person 
makes  a  tool  and  another  uses  the  tool,  the  two  combine  in  making 
the  consumable  thing.  Thru  this  time-using  and  elaborate  process 
more  consumable  things  ore  likely  to  be  made  than  w^ould  be  made 
in  a  simpler  process;  and  this  increase  in  the  output  goes  far  to  ex- 
plain why  there  is  a  return  interest)  to  the  owners  of  tools.  But 
to  explain  how  a  return  to  the  owners  arises  is  not  the  same  thing  as 
to  demarcate  a  separate  product.  There  is  no  separate  product  of 
the  tool  on  the  one  hand  and  of  the  labor  using  the  tool  on  the  other. 
There  is  a  joint  product  of  all  the  labor  applied  —  earlier  labor  as 
w^ell  as  later  labor.     We  may  disengage  the  causes  determining  why 

1  See  what  is  said  under  the  head  of  Socialism,  Chapter  66,  §  3. 

2  In  Chapter  38,  §  4. 


214  THE  DISTRIBUTION  OF  WEALTH  [52- §  5 

and  how  the  laborers  who  use  and  make  the  tools  get  wages,  from 
the  causes  determining  why  and  how  the  owner  of  the  tools  gets 
interest;  but  we  can  disengage  no  concretely  separable  product  of 
labor  and  capital.  It  is  on  this  ground,  here  stated  as  concisely  as 
may  be,  that  I  would  turn  to  some  other  mode  of  analyzing  the 
causes  which  underlie  the  general  rate  of  the  return  to  labor. 

§  5.  The  simplest  and  clearest  mode  of  stating  the  theory  of 
general  wages  is,  in  my  judgment,  to  say  that  wages  are  determined 
by  the  discounted  marginal  product  of  labor.  Let  attention  be  given 
to  the  two  elements  in  this  somewhat  cumbrous  formula:  "mar- 
gin" and  "discount." 

What  is  meant  by  marginal  product  will  be  obvious  enough.  It 
appears  most  clearly  as  regards  agricultural  produce  and  the  theory 
of  rent  applicable  to  such  produce.  Wages  and  interest  are  deter- 
mined at  the  margin  of  cultivation.  Any  excess  secured  on  land 
better  than  the  marginal  land  goes  to  the  landowner  and  does  not 
affect  the  returns  of  other  persons.  The  same  principle  is  applic- 
able to  monopoly  gains  and  to  all  differential  gains.  The  laborer 
who  deals  with  the  owner  of  good  land,  or  with  a  monopolist,  must 
accept  what  can  be  paid  him  by  the  marginal  landowner  or  the 
competitive  producer.  Any  extra  or  differential  returns  go  to  the 
fortunate  owners  of  those  instrmnents  which  have  been  sheltered 
by  nature  or  by  social  institutions  from  unfettered  competition. 

Discount  implies  an  advance.  Let  it  be  recalled  that  produc- 
tion takes  time;  that  the  materials  and  machinery  needed  in  the 
time-using  process  are  made  by  laborers.  Wealth  is  unequally  dis- 
tributed, and  the  immense  majority  of  the  laborer?  have  not  the 
wherewithal  to  support  themselves  during  the  prolonged  period. 
Their  remuneration  is  advanced  to  them  gut^of  a  surplus  possessed 
by  some  one  else.  The  operations  of  the  capitalists  consists  in  a 
succession  of  advances  to  laborers.^  The  capitalist  class  secures 
its  gain  thru  the  process  of  handing  over  to  the  laborers  less  than 
the  laborers  eventually  produce.  The  product  of  labor  is  dis- 
counted by  the  capitalist  employers. 

This  view  may  be  stated,  in  more  technical  terms,  by  saying  that 

1  Compare  Chapter  5,  §  5;  Chapter  38,  §  4. 


52-§5]  THE  GENERAL  LEVEL  OF  WAGES  215 

labor  is  a  "future"  good  in  the  same  sense  in  which  a  machine  or  a 
store  of  material  is  a  future  good.  It  is  a  means  by  which  "pres- 
ent" goods  (consumable  commodities,  or,  more  strictly,  satisfac- 
tions) are  eventually  got.  The  essence  of  the  explanation  of  in- 
terest is  that  present  goods  are  preferred  to  future  goods;  that  pres- 
eiiFmeans,  or  sources  of  satisfaction  in  hand,  will  not  be  exchanged 
at  par  for  sources  of  satisfaction  that  are  to  accrue  in  the  future.^ 
The  same  proposition  is  put  in  still  different  terms  by  saying  that 
"saving"  or  "postponement"  or  "waiting"  ordinarily  involves  a 
sacrifice,  and  will  not  be  incurred  unless  there  is  a  reward.  The  i 
theoryof  wages  is  thus  strictly  consistent  with  the  theory  of  interest. ' 

In  this  process  of  discounting,  the  whole  series  of  productive 
operations  must  be  regarded.  The  "practical"  man  will  readily 
accede  to  the  notion  of  a  discount,  as  regards  the  particular  seg- 
ment of  industry  with  which  he  is  familiar.  It  will  be  obvious  to 
him  that  the  laborer  cannot  be  paid  as  much  as  the  product  will 
sell  for;  otherwise  nothing  will  be  left  for  the  employer  and  capital- 
owner.  But  the  advances  to  laborers  are  needed  for  a  much  longer 
period  than  that  which  must  elapse  until  the  mere  stage  of  sale- 
ability  is  realized.  The  product  which  is  sold  is  likely  to  be  itself 
some  sort  of  "capital  good";  it  represents  only  one  stage  in  the 
series  of  advances.  The  person  selling  machines  or  materials  re- 
discountSj  so  to  speak;  the  capitalist-employer  who  buys  them 
recoups  the  original  employer,  and  then,  in  the  course  of  the  next 
stage  of  production,  adds  further  advances  of  his  own  to  other  la- 
borers. Not  thru  one  stage  only  —  not  merely  in  the  payment  of 
wages  by  the  individual  employer  until  he  sells  his  goods  —  but  ^ 
thru  all  the  stages,  from  the  first  gathering  of  materials  and  the 
first  fashioning  of  tools  up  to  the  final  emergence  of  satisfaction- 
yielding  "real"  income,  advances  to  workmen  as  a  whole  are  made 
by  the  capitalists  as  a  whole,  and  discounting  takes  place  at  each 
successive  stage. 

This  discount  we  may  assume  (provisionally)  to  take  place  at  the 
current  rate  of  interest.  Evidently  the  simpler  the  processes  and 
the  more  predictable  their  outcome;  the  more  effective,  too,  the 

>  Compaxe  Chapter  40,  §  4. 


216  THE  DISTRIBUTION  OF  WEALTH  [52-§  6 

competition  among  capitalists —  the  closer  will  be  the  correspon- 
dence between  future  product  and  present  wages.  The  discount 
then  will  be  easy  to  calculate.  Where  the  process  is  complicated, 
long-stretched-out,  and  uncertain  as  to  its  outcome,  the  relation 
between  wages  and  product  is  a  very  loose  one.  Such  an  opera- 
tion as  the  construction  of  the  Panama  Canal  illustrates  the  maxi- 
mum of  uncertainty  in  the  relation  between  product  and  wages. 
It  took  years  to  build  the  Canal;  it  will  take  further  years  before 
its  effects  on  the  ocean  routes  and  on  the  cost  of  transportation 
are  worked  out;  and  still  further  years  before  these  changes  affect 
the  international  division  of  labor  and  the  ultimate  increase  of 
product  due  to  increased  geographical  specialization.  Those  en- 
gaged on  construction  work  at  the  Canal  could  not  receive  wages 
determined  by  the  discounted  value  of  the  product  of  their  own 
labor.  They  received  the  current  discounted  value  of  similar  labor 
in  those  routine  industries  where  experience  had  indicated  the 
output.  The  Panama  Canal,  as  it  happened,  tho  begun  as  a  pri- 
vate enterprise,  was  carried  to  completion  by  the  United  States 
government,  with  virtually  no  regard  to  pecuniary  profit.  Under 
such  circumstances  the  particular  product  of  the  laborer  could  have 
hardly  the  remotest  bearing  on  the  wages  paid  them.  Even  where 
there  is  private  investment  and  the  ordinary  calculation  of  prob- 
able output  and  expected  profit,  every  venturesome  operation, 
above  all  if  it  involves  the  making  of  new  plant,  is  conducted  under 
the  wage  rates  determined  by  the  experience  and  the  traditions  of 
industry  at  large.  In  such  operations  the  business  man  exercises 
his  most  characteristic  functions,  and,  if  successful,  procures  his 
highest  returns.  He  not  only  discounts,  he  speculates;  and  he  pays 
to  his  laborers  the  rate  of  wages  fixed  in  those  operations  in  which 
the  discount,  on  the  basis  of  the  current  rate  of  interest  and  of  the 
ordinary  return  to  the  ordinary  business  man  for  his  own  labor,  is 
comparatively  simple  and  calculable. 

§  6.   Two  qualifications  must  be  borne  in  mind  in  this  reasoning; 
one  with  regard  to  the  discount,  the  other  with  regard  to  the  margin. 

(1)  It  was  assumed  in  the  preceding  section  that  the  discounting 
takes  place  at  the  current  rate  of  interest.     Here  we  must  be  on  our 


52-§6]  THE  GENERAL  LEVEL  OF  WAGES  217 

guard  against  reasoning  in  a  circle.  In  previous  chapters,  interest 
has  been  accounted  for,  in  part  at  least,  by  the  fact  that  there  is  a 
"productivity"  of  capital;  it  results  from  the  application  of  labor 
in  more  productive  ways.  If  this  were  the  whole  theory  of  inter- 
est, we  should  reason  in  a  circle  in  saying  that  wages  are  determined 
by  a  process  of  discount.  If  interest  depended  simply  on  the  excess 
of  what  the  laborers  produce  in  the  future  over  what  is  advanced  to 
them  in  the  present,  the  rate  of  interest  then  would  result  from  the 
process  of  advances  to  laborers ;  it  could  not  also  regulate  or  deter- 
mine the  amount  of  those  advances. 

But,  as  has  already  been  pointed  out  in  the  previous  chapters,^ 
the  conception  of  the  "productivity"  of  capital  explains  only  the 
demand  price  of  capital.  The  conditions  of  supply  and  the  equi- 
librium of  demand  and  supply  are  also  to  be  considered.  If  there  is 
a  regulator  of  interest  in  the  way  of  a  general  or  marginal  time 
preference  —  a  minimum  return  necessary  to  induce  saving  and 
accumulation  on  a  large  scale  —  then  and  then  only  have  we  an 
independent  determination  of  interest,  and  so  a  tenable  theory  of 
wages  as  the  result  of  an  operation  of  discount.  The  chief  evidence 
which  we  have  of  such  a  fundamental  supply  price  has  been  found 
in  the  steadiness  of  the  rate  of  interest  during  the  modern  period. 
At  all  events,  unless  there  be  such  a  basic  and  independently  de- 
termined rate  of  interest,  the  conception  of  discounting  labor's 
product  can  lead  to  no  consistent  conclusion  on  the  apportionment 
of  returns  between  laborers  and  capital-owners. 

(2)  A  competitive  margin  is  assumed,  at  which  the  process  of 
discounting  is  carried  on  with  some  approach  to  certainty-  At 
that  margin  there  is  nothing  in  the  nature  of  rent  or  monopoly  gain ; 
nor  is  there  exceptional  profit  by  a  business  man  of  unusual  capa- 
city. We  suppose  a  representative  firm,  carrying  on  its  operations 
at  the  margin  of  cultivation,  securing  for  its  owners  and  managers 
ordinary  business  profits  and  interest  on  capital,  but  nothing 
more.  What  is  paid  in  wages  here  settles  wages  in  the  more  prof- 
itable establishments  also;  and  what  is  paid  in  wages  here  is  settled 
by  the  process  of  discounting. 

1  See  Chapter  39,  especially  §§  4,  5. 


218  THE  DISTRIBUTION  OF  WEALTH  [52-§7 

Here,  again,  the  theory  of  wages  connects  itself  with  other  parts 
of  the  theory  of  distribution.  The  distinction  between  interest  on 
the  one  hand,  and  rent  and  monopoly  gains  on  the  other,  depends 
on  the  assumption  of  a  competitive  rate  of  return  for  capital  —  on 
the  existence  of  a  broad  margin  where  those  returns  only  are  secured 
which  are  necessary  to  induce  the  investment  and  management  of 
capital.  If  there  be  no  such  margin,  there  is  no  ground  for  distin- 
guishing between  interest  and  the  other  returns  to  the  owners  of 
capital  and  land.i  And  if  there  be  no  such  margin,  there  is  no 
ground  for  saying  that  wages  are  in  any  determinate  relation  to  the 
product  of  labor.  If  the  return  to  the  owners  of  capital  is  only  a 
matter  of  accident,  or  the  result  merely  of  power  in  their  hands,  the 
amount  which  they  will  advance  to  laborers  is  subject  to  no  con- 
trolling tendency.  The  most  that  can  then  be  said  is  that  the  gen- 
eral level  of  wages  will  depend  on  the  relation  between  the  number 
of  the  laborers  and  the  amounts  which  the  capitalists  are  induced 
to  advance. 

There  is  doubtless  a  lessening  range  of  competition  in  modern 
times.  The  margin  is  far  from  coextensive  with  the  field  of  indus- 
try; rent  and  monopoly  profits  play  a  larger  part  than  in  previous 
generations.  There  is  thus  a  wider  divergence  between  wages  and 
the  total  discountable  product  of  labor.  The  concentration  of  the 
control  of  capital,  and  the  growth  of  combination  and  monopoly, 
suggest  that  competition  may  be  in  process  of  complete  disap)- 
pearance.  If  so,  all  our  reasoning  as  to  a  normal  rate  of  interest 
or  a  normal  rate  of  wages  falls  to  the  ground.  Distribution  then 
becomes  nothing  more  than  a  struggle  between  hostile  forces. 
But  the  same  considerations  which  lead  to  a  conclusion  that  there 
is  a  competitive  region  in  which  the  return  to  capital  is  settled,  lead 
to  the  conclusion  that  in  this  region  the  return  to  labor  is  also  set- 
tled. A  very  large  part,  probably  the  larger  part,  of  modern  indus- 
try is  still  conducted  under  the  leveling  conditions  of  competition; 
and  there  is  an  approximation  of  wages,  by  way  of  discount,  to  the 
product  at  this  margin. 

§  7.  The  fluctuations  of  wages  above  and  below  the  general  level 

1  See  Chapter  46,  §  3. 


52-§7l  THE  GENERAL  LEVEL  OF  WAGES  219 

determined  by  the  discounting  of  the  marginal  product  are  much 
affected  by  the  conditions  under  which  the  advances  are  made. 
Here,  as  elsewhere  in  the  economic  field,  the  working  of  the  funda- 
mental cause  is  obscured  by  the  more  superficial  factors. 

The  employers  pay  wages  in  money.  The  money  is  used  by  the 
laborers  in  buying  goods  and  services  —  chiefly  goods.  Both  the 
extent  and  the  continuity  with  which  money  advances  are  made, 
and  the  state  of  the  supply  as  to  the  goods  bought  with  the  money, 
affect  the  fluctuations  in  the  level  of  wages. 

The  store  of  things  from  which  come  real  wages  —  that  is,  the 
goods  bought  with  the  money  wages  —  reaches  the  laborer's  hands 
thru  a  flow;  as  indeed  all  income  reaches  the  consumers  thru  a  flow. 
We  may  use  the  simile  of  a  reservoir,  constantly  drawn  on,  con- 
stantly refilled.  The  stocks  of  the  retail  dealers  constitute  the 
supply  immediately  available.  Back  of  these  are  the  stocks  of  the 
wholesale  dealers;  back  of  these,  again,  the  goods  in  process  of  man- 
ufacture among  the  "producers."  The  very  buildings  and  ma- 
chinery may  be  said  to  contain  —  much  as  the  raw  materials  do  — 
the  potentialities  of  future  consumable  goods.  The  whole  stock 
of  wealth  in  its  various  stages  may  be  regarded,  in  the  language  of 
Bohm-Bawerk,  as  one  great  subsistence  fund,  of  which  a  part  only 
is  available  at  once,  the  larger  part  being  gradually  made  available 
by  the  steady  pushing  of  the  unfinished  goods  toward  the  stage 
where  they  are  ready  for  enjoyment.  So  conceived,  the  whole  mass 
may  be  described  as  a  reservoir,  from  which  the  community  is  con- 
stantly drawing  a  stream  of  finished  goods  (and  so  of  enjoyments), 
and  into  which  its  labor  is  constantly  replacing  what  is  drawn  off. 

The  flow  of  finished  goods  or  available  real  income  is  evidently 
elastic.  The  rate  at  which  the  reservoir  can  be  tapped  is  subject 
to  considerable  variation.  In  one  sense,  the  income  of  the  whole 
community  may  be  said  to  be  predetermined ;  more  cannot  be  got 
during  a  given  period  than  the  existing  apparatus  of  production  isi 
capable  of  yielding  during  that  period.  In  a  sense,  too,  the  income 
of  any  particular  class  in  the  community  may  be  said  to  be  pre- 
determined, in  so  far  as  the  inflowing  goods  are  already  adapted  to 
the  traditional  tastes  of  different  classes.     But  there  remains  a 


220  THE  DISTRIBUTION  OF  WEALTH  [52-§7 

considerable  degree  of  adjustability  —  more  or  less  rapid  flow, 
diversion  of  goods  and  materials  toward  one  or  another  set  of  con- 
sumers —  and  hence  a  response  of  real  wages  to  variations  in  the 
money  advances  from  the  capitalists. 

The  money  advances  from  the  capitalist-employers,  again,  are 
affected  by  their  expectations  of  gain.  In  times  of  hopefulness 
and  activity,  money  wages  will  be  paid  out  more  freely,  and  the 
available  supplies  of  goods  will  be  drawn  on  with  corresponding 
freedom.  In  times  of  uncertainty  and  depression,  the  movement 
will  be  a  sluggish  one.  In  good  times,  tho  prices  usually  advance 
faster  than  money  wages,  employment  is  more  certain  and  con- 
stant, and  real  wages  (commodity  wages)  on  the  whole  tend  to 
become  larger.  The  business  men  and  the  investors  secure  between 
them  the  excess  of  product  over  and  above  what  has  been  advanced 
to  the  laborers.  If  the  excess  is  large,  and  if  competition  among 
employers  and  investors  is  active,  they  will  be  led  (especially  in 
brisk  times)  to  make  larger  advances,  and  wages  will  gradually  rise. 
If  the  excess,  tho  large,  is  secured  under  conditions  of  monopoly, 
or  with  the  use  of  limited  natural  resources,  the  capitalist  class 
will  reap  extra  gains;  but  wages  will  not  be  affected. 

In  the  long  run,  the  amount  which  can  be  drawn  from  the  reser- 
voir by  the  laborers  will  depend  on  what  they  put  into  it,  as  well  as 
on  the  competition  of  the  capitalists  among  themselves.  A  high 
general  rate  of  wages  for  hired  laborers  thus  depends  on  general 
high  productivity  of  industry  —  or,  more  precisely,  on  high  mar- 
ginal productivity  —  and  on  active  competition  among  the  owners 
of  capital.  Where  laborers  are  not  hired,  but  work  for  them- 
selves, the  relation  between  their  reward  and  the  productivity  of 
their  labor  is  obviously  more  direct  and  certain.  The  broad  differ- 
ences of  wages  which  appear  in  different  countries  are  explicable 
by  this  main  cause.  If  wages  are  higher  in  the  United  States  than 
in  England  and  Germany,  higher  in  these  than  in  Italy  and  Austria, 
higher  in  all  European  countries  than  in  India,  China  and  Japan, 
the  explanation  is  to  be  found  in  the  varying  productiveness  of  labor 
in  the  several  countries.  So  it  is  with  the  great  changes  in  wages 
from  time  to  time.     Since  the  middle  of  the  nineteenth  century 


52-§8]  THE  GENERAL  LEVEL  OF  WAGES  221 

there  has  been  a  rise  in  general  wages  (commodity  wages)  in  all  the 
countries  of  advanced  civilization.  The  basis  for  that  rise  has 
been  the  steadily  growing  productiveness  of  labor,  due  to  the 
manifold  advances  in  the  arts. 

§  8.  Returning  now  to  the  conception  of  a  discount  and  to  the 
relations  between  wages  and  interest,  it  is  to  be  noted  that  a  high 
absolute  rate  of  wages  usually  is  found  where  the  proportion  of 
total  wages  to  total  interest  is  comparatively  small.  The  amount 
of  income  of  the  interest-receiving  classes  depends  on  the  quantity 
of  the  advances  made  by  them,  and  on  the  rate  of  the  discount  — 
that  is,  the  rate  of  interest.  With  the  same  rate,  their  income 
tends  to  be  larger  as  production  becomes  more  "capitalistic"  — 
that  is,  as  it  spreads  over  more  time  w^ith  the  increasing  use  of  plant 
and  the  increasing  elaboration  of  materials.  Just  as  discount 
figures  more  largely  in  the  present  value  of  a  five-year  note  than  in 
that  of  a  one-year  note,  so  interest  figures  more  largely  in  a  com- 
munity where  the  period  of  production  is  long  and  the  capital  per 
laborer  is  large.  The  inequalities  of  income  tend  in  this  sense  to 
become  greater  as  total  income  becomes  larger.  True,  within  the 
capital-owning  class  itself,  inequalities  will  not  necessarily  become 
greater;  for  the  number  of  persons  owning  capital  may  increase  as 
fast  as  its  amount  increases  and  ownership  may  be  no  more  concen- 
trated. But  the  absolute  amount  of  income  going  to  this  class 
tends  to  increase,  and  its  share  of  total  income  tends  also  to  in- 
crease; whereas  for  the  laborers,  tho  their  aggregate  income  may 
increase,  their  share  of  the  total  income  of  society  tends  to  decline. 
Hence  it  is  that  wages  are  high  in  those  communities  in  which  the 
accumulation  and  investment  of  capital  are  great  and  in  which  the 
total  return  to  capitalists  is  large.  Plant,  machinery,  huge  collec- 
tions of  materials,  an  elaborate  apparatus  of  production,  are  the 
means  by  which  high  productivity  of  labor  is  normall}^  secured. 
It  is  true  that  in  new  countries  other  conditions  may  bring  about 
high  wages.  Labor  in  them  is  likely  to  be  confined  largely  to  agri- 
culture and  other  extractive  industries  in  which  virgin  resources 
are  turned  to  account  and  in  which  there  is  comparatively  little  use 
of  elaborate  fixed  capital.    Such  was  the  situation  of  the  United 


222  THE  DISTRIBUTION  OF  WEALTH  [52-§9 

States  during  the  first  century  of  its  history;  such  is  that  of  Canada, 
Austraha,  New  Zealand.  But  in  old  countries  the  cause  by  which 
high  wages  are  made  possible  —  a  high  productivity  of  industry  — 
is  that  very  employment  of  much  capital  which  brings  a  large 
return  to  the  capital-owning  class.  Great  Britain  iias  higher  wages 
and  a  larger  capitalist  income  than  the  countries  of  the  Continent; 
in  all  the  European  countries  both  are  larger  than  Japan,  China, 
India.  In  general,  the  forces  which  make  the  total  income  of 
society  high  and  the  general  level  of  wages  high,  cause  the  propor- 
tion of  income  which  forms  return  on  capital  to  become  large. 

This  tendency,  inherent  in  the  growth  of  capitalistic  production, 
becomes  accentuated  in  the  degree  to  which  there  is  departure  from 
competitive  conditions.  Monopoly  gains  and  economic  rent  also 
increase  the  proportion  of  total  income  which  goes  to  the  possessing 
classes.  Such  gains,  even  tho  they  have  not  become  so  all-pervad- 
ing as  to  wipe  out  the  whole  regime  of  competition,  have  become 
of  wider  extent  in  modern  times.  In  the  main,  they  too  are  large 
where  prosperity  is  widely  diffused,  where  the  general  productive- 
ness of  labor  is  great,  and  where  the  rate  of  wages  is  high.  Like  the 
growth  of  interest  pure  and  simple,  their  increase  is  the  consequence 
of  large-scale  production  and  of  advancing  population.  They  are 
more  readily  subject  to  regulation  and  curtailment  than  interest, 
and  hence  are  not  so  inevitably  the  consequences  of  modern  indus- 
try. But  some  degree  of  accentuation  in  inequality  seems  una- 
voidable from  this  cause  also.  An  enlargement  of  the  leisure  class 
and  a  diminution  of  the  proportion  of  income  going  to  the  laborers 
are  the  natural  concomitants  of  material  progress  under  the  sys- 
tem of  private  property. 

§  9.  The  doctrine  stated  in  this  chapter,  that  wages  depend  on 
the  discounted  marginal  product  of  labor,  will  seem  to  many  per- 
sons a  dim  and  abstract  one,  remote  from  the  problems  of  real  life. 
Any  theory  concerning  wages  at  large  must  deal  with  distant  forces 
and  nebulous  consequences;  it  has  of  necessity  an  appearance  of 
unreality.  Partly  for  this  reason  many  economists  have  refrained 
from  undertaking  a  general  statement.  Yet  this  defect  is  inherent 
in  almost  all  the  doctrines  on  the  ultimate  causes  of  large  economic 


52-§9]  THE  GENERAL  LEVEL  OF  WAGES  223 

phenomena.  The  same  apparent  lack  of  connection  with  the  de- 
tails of  industrial  life  appears  in  the  proposition  that  interest  is 
determined  by  the  relation  between  marginal  productivity  and 
marginal  saving;  that  the  quantity  of  the  circulating  medium  de- 
termines the  general  range  of  prices;  that  the  equilibrium  of  inter- 
national demand  determines  the  varying  money  incomes  and  price 
levels  of  different  countries.  All  these  propositions  search  out 
truths  which  are  of  direct  and  practical  concern,  even  tho  they 
state  tendencies  which  are  slow  moving  and  loom  up  indistinctly. 
Like  the  others,  the  doctrine  here  presented  concerning  the  general 
level  of  wages  considers  ultimate  forces;  and  these  are  the  very 
forces  which  must  be  scanned  and  weighed  in  any  endeavors  to 
raise  the  general  rate.  An  all-embracing  and  considerable  advance 
can  come,  under  the  regime  of  private  property,  only  if  produc- 
tivity is  increased,  if  the  margin  is  keyed  up,  if  the  discount  is 
narrowed  by  the  accumulation  and  competition  of  capital.  Every- 
thing that  raises  the  productive  margin,  that  lessens  the  rate  of 
discounting,  tends  to  raise  wages;  and  in  the  last  resort  it  is  only 
in  these  ways  that  a  general  advance  can  be  brought  about. 

Is  there  under  these  conditions  the  possibility  of  a  large  improve- 
ment in  the  condition  of  the  mass  of  mankind?  The  usual  rate  of 
wages  for  ordinary  labor  in  the  United  States  was  during  the  first 
decade  of  the  twentieth  century  not  far  from  $800  a  year.  This  is 
much  better  than  savagery,  much  more  than  what  most  men  have 
been  able  to  get  at  almost  any  time  in  any  country.  Yet  it  is 
much  less  than  is  needed  for  a  life  that  seems  to  the  more  fortunate 
minority  worth  living.  It  gives  little  margin  above  the  bare  physi- 
cal needs,  little  chance  for  leisure,  for  spontaneous  activity,  for  cul- 
ture, for  full  development  of  personality.  If  no  more  is  in  pros- 
p>ect,  the  institution  of  private  property  stands  not  only  on  the 
defensive  but  in  a  position  that  cannot  long  be  defended.  Yet 
something  better  is  by  no  means  incompatible  with  the  system. 
We  may  hope  for  a  gradual  rise  in  v\^ages,  under  the  influence  of  the 
forces  considered  in  the  preceding  pages,  above  all  from  the  for- 
ward march  of  the  technical  arts.  Great  as  the  advance  of  the 
arts  has  been  during  the  last  century  or  two,  it  is  likely  to  be  even 


224  THE  DISTRIBUTION  OF  WEALTH  [52-§9 

greater  during  the  centuries  to  come;  and  the  main  strength  of  the 
individualist  and  capitaUst  system  is  that  it  promotes  industrial 
progress  more  effectively  than  the  rival  system  of  collectivism.  It 
is  at  least  an  open  question  whether  it  will  not  bring  in  time  a  dif- 
fusion of  comfort  and  economic  security  among  the  masses  greater 
than  can  be  attained  under  any  other  form  of  industrial  organiza- 
tion. 

That  this  end  may  be  reached,  it  is  necessary,  first,  that  very 
considerable  modifications  shall  be  made  from  the  traditional  rules 
and  limits  of  the  system  of  private  property;  and  second,  that  the 
numbers  of  the  manual  laborers  shall  not  increase  so  fast  as  to 
swallow  up  all  the  possibilities  of  gain.  The  fii'st  of  these  con- 
ditions will  be  considered  in  the  two  later  Books,  on  Problems  of 
Labor  and  of  Economic  Organization.  The  second,  that  of  popu- 
lation, will  be  considered  at  once,  in  the  chapters  immediately 
following. 


CHAPTER  53 
Population  and  the  Supply  of  Labor 

Section  1.  The  Malthusian  theory,  how  far  strengthened  by  biological 
science,  225  —  Sec.  2.  The  maximum  birth  rate,  the  minimum  death 
rate,  the  consequent  possibihties  of  multiplication.  In  what  sense  there  is 
a  tendency  to  rapid  multiplication;  the  positive  and  preventive  checks, 
226 —  Sec.  3.  The  actual  birth  rates  and  death  rates  of  some  countries  in 
modern  times.  A  high  birth  rate  ordinarily  entails  a  high  death  rate. 
Explanation  of  exceptions.  The  situation  in  the  United  States,  230  — 
Sec.  4.  Does  a  high  birth  rate  cause  low  wages,  or  vice  versa?  Inter- 
action of  causes.  A  limitation  of  numbers  not  a  cause,  but  a  condition, 
of  general  prosperity  and  high  wages,  236  —  Sec.  5.  The  standard  of 
living  affects  wages,  not  directly,  but  thru  its  influence  on  numbers. 
Fallacies  on  this  subject,  237  —  Sec.  6.  Mode  in  which  the  modern 
decline  in  the  birth  rate  has  taken  place,  239. 

§  1.  The  supply  of  labor  depends  on  the  increase  in  the  num- 
bers of  mankind.  The  problems  concerning  the  growth  of  popu- 
lation bear  not  only  on  the  distribution  of  wealth,  but  on  other 
parts  of  economics  also,  not  to  mention  wider  social  questions;  and 
there  is  divergence  of  practise  among  economists  as  to  the  place 
which  they  should  have  in  the  exposition  of  the  subject.  Popula- 
tion is  considered  in  this  book  at  a  later  stage  than  is  often  assigned 
to  it.  Although  discussed  in  the  following  pages  mainly  in  con- 
nection with  the  theory  of  distribution,  it  will  lead  to  some  digres- 
sions from  that  topic. 

A  long  controversy  has  been  carried  on  regarding  the  Malthusian 
theory.  In  the  early  part  of  the  nineteenth  century  ^  IMalthus  set 
forth  that  the  cause  of  low  w^ages  and  poverty  lay  in  the  large  num- 
bers of  mankind ;  that  there  was  a  tendency  of  population  to  press 
upon  subsistence  and  keep  wages  low;  that  a  rise  in  w^ages  could 

1  The  second  edition  of  the  Essay  on  Population  (1803)  is  that  in  which  Malthus 
stated  his  doctrines  in  the  form  in  which  they  continued  to  be  maintained  by  him 
and  his  followers. 

225 


226  THE  DISTRIBUTION  OF  WEALTH  [53-§2 

not  take  place  unless  the  tendency  to  increase  among  the  laboring 
classes  was  checked;  that  in  the  absence  of  a  check  no  plans  for 
improvement  in  the  condition  of  the  mass  of  men  had  any  prospects 
of  success;  and  that  for  these  reasons  all  proposed  reorganizations 
of  society  were  doomed  to  failure.  Moreover,  Malthus  was  not 
hopeful  that  any  salutary  check  would  in  fact  be  applied.  It  can- 
not be  said  that  he  was  hopeless;  but  the  drift  of  his  teaching,  and 
certainly  the  point  of  view  of  his  followers,  was  that  the  number  of 
laborers  was  likely  to  increase  very  rapidly  and  that  wages  would 
probably  be  kept  down  to  a  subsistence  level.  In  this  state  of 
facts  he  found  a  serious  obstacle/atmost  an  insuperable  obstacle, 
to  any  great  improvement  in  the  material  welfare  of  the  mass 
of  mankind. 

Some  parts  of  Malthus's  teaching  have  been  sustained  by  the 
course  of  thought  since  his  time.  Man  is  an  animal,  physiologi- 
cally like  any  other;  and  the  possibilities  of  his  increase  in  numbers 
are  as  unlimited  as  they  are  for  any  form  of  life.  It  is  an  odd  cir- 
cumstance that  Darwin,  reading  Malthus's  Essay,  was  led  to  the 
reflection  that  not  man  only,  but  any  sort  of  creature,  has  the  pos- 
sibility of  indefinite  increase;  and  hence  reached  the  conclusion  that 
there  is  an  unceasing  struggle  for  room  and  sustenance,  and  a  sur- 
vival of  those  best  able  to  cope  with  their  surroundings.  Darwin's 
own  wider  conclusion  then  reenforced  Malthus's  views  as  to  the 
human  species.  The  elephant  can  double  his  numbers  every  one 
hundred  years,  man  every  twenty-five  years;  cats  bring  forth  six- 
fold twice  or  thrice  a  year,  and  fishes  can  reproduce  hundreds  and 
thousands  of  their  kind  each  season.  Any  species  that  multiplies 
at  its  maximum  rate  must  eventually  outrun  the  means  of  subsist- 
en|^ 

§  2.  Let  us  look  more  closely  at  the  possible  increase  in  human 
numbers  and  compare  it  with  the  rates  of  increase  which  we  actu- 
'ally  find.  The  possible  increase  must  depend  on  the  possible  ex- 
cess of  the  births  over  the  deaths.  The  maximum  birth  rate  in  a 
normally  constituted  population  is  at  least  45  per  1000;  that  is,  for 
every  1000  living  persons  there  may  be  as  many  as  45  births  each 
year.     If  a  population  were  made  up  solely  of  men  and  women  of 


53-§2]  POPULATION  AND  SUPPLY  OF  LABOR  227 

the  reproductive  ages,  the  rate  might  be  for  a  brief  time  very  much 
higher.  If  a  population  contained  merely  an  abnormal  propor- 
tion of  persons  of  these  ages  (as  is  the  case  in  regions  where  there  is 
a  steady  influx  of  immigrants),  the  rate  again  might  be  considerably 
higher.  Even  for  a  normally  constituted  population,  with  the  due 
proportion  of  children  and  aged,  the  figure  45  is  below  the  physio- 
logical maximum.  That  maximum  is  probably  as  high  as  50  per 
1000,  possibly  higher.  For  the  present  purpose,  that  of  comparing 
possible  increase  with  actual  increase,  it  will  be  best  to  take  the 
figure  which  certainly  can  be  reached  —  say  45  per  1000  in  each 
year. 

On  the  other  hand,  the  minimum  death  rate  is  certainly  as  low 
as  15  per  1000  each  year.  Here,  too,  a  normally  constituted  popu- 
lation must  be  assumed.  A  population  having  an  undue  share  of 
persons  in  the  prime  of  life  would  easily  show  a  lower  death  rate; 
while  one  having  —  say  as  the  result  of  emigration  of  the  able- 
bodied  —  an  undue  share  of  very  old  and  very  young  would  hardly 
be  able,  even  under  the  most  favorable  conditions,  to  show  a  rate  so 
low.  In  a  normally  constituted  population  a  rate  as  low  as  this  is 
certainly  possible.  Some  such  figure  as  15  per  1000  would  be 
found  if  all  preventable  causes  of  death  were  done  awaj^  with;  if 
there  were  no  deaths  from  curable  diseases,  and  none  due  directly 
or  indirectly  to  poor  nourishment,  insufficient  care,  unsanitary 
surroundings;  if  the  end  came  only  in  peaceful  old  age,  or  from 
disease  which  could;  be  prevented  by  H«rcare  and  ae^^nedical  skill. 
Indeed,  if  all  these  possibilities  were  realized,  the  rate  would  cer- 
tainly be  lower.  There  are  populations  in  which  a  rate  nearly  as 
low  is,  in  fact,  found ;  and  it  is  certain  that  in  these  there  are  many 
deaths  which  could  have  been  prevented.  Medical  science,  more- 
over, is  rapidly  advancing.  It  has  very  greatly  lowered  during  the 
past  generation  the  death  rate  from  infectious  and  contagious  dis- 
eases; it  may  reduce  as  markedly  that  from  organic  and  degenera- 
tive diseases  which  are  most  fatal  to  adults.  The  minimiun  death 
rate  may  be  expected  to  become  lower  and  lower.i 

1  Newly  settled  regions,  and  rapidly  growing  cities,  into  which  persons  in  the 
prime  of  life  are  fiocking,  show  death  rates  as  low  as  12  or  13  per  1000.     These  rates 


228  THE  DISTRIBUTION  OF  WEALTH  [53-§2 

No  race  or  country  concerning  which  we  have  accurate  infor- 
mation exhibits  either  the  maximum  birth  rate  or  the  minimum 
death  rate  as  here  stated.  But  for  the  broad  conckisions  with 
which  we  are  concerned,  it  is  not  necessary  to  be  precisely  accu- 
rate about  these  extremes.  It  suffices  to  indicate  how  wide  is  the 
possible  variation  between  the  birth  rate  and  the  death  rate,  and 
how  great  is  the  possible  increase  of  population.  If  births  are  45  per 
1000  annually,  and  deaths  15  per  1000,  the  excess  of  births  over 
deaths,  or  increase  of  population,  is  30  per  1000.  With  this  rate 
of  increase,  numbers  will  double  every  23  years.  Malthus  him- 
self deduced  a  similar  possible  rate  of  increase  from  what  he  found, 
or  thought  he  found,  in  an  actual  case.  "  In  the  Northern  states  of 
America  .  .  .  the  population  has  been  found  to  double  itself,  for 
above  a  century  and  a  half  successively  [that  is,  from  1650  to  1800], 
in  less  than  twenty-five  years."  Malthus  thought  that  an  increase 
even  more  rapid  might  take  place,  and  that  the  doubling  period 
might  be  as  low  as  fifteen  years.  This  probably  exaggerates  the 
potentiality  of  increase.  But  it  is  certainly  within  the  bounds  of 
possibility  that  the  numbers  of  mankind  should  double  within  such 
a  period  as  has  just  been  indicated  —  in  a  quarter  of  a  century  or 
thereabouts. 

Not  only  is  there  a  possibility  of  so  rapid  an  increase  as  this;  there 
is  a  tendency  toward  it.  By  tendency  here  we  do  not  mean  what 
is  often  meant  by  the  term  —  probability  that  in  the  long  run  a 
given  result  will  be  reached.  This  is  the  sense  in  which  we  can  say 
there  is  a  tendency  that  commodities,  freely  produced,  will  sell  for  a 
price  determined  by  their  expenses  of  production.  In  speaking  of 
the  tendency  of  the  population  to  increase  at  its  maximum  rate,  we 
mean  something  difi^erent  —  that  there  are  forces  in  pperatipn 
which,  unless  counteracted,  will  bring,  about  the  stated  result.  In 
the  same  way  we  say  that  there  is  a  tendency  for  all  bodies  to  fall 

are  sometimes  paraded  as  evidence  of  unusual  healthfulness;  they  are  due  (when  not 
explained  by  inaccuracy  of  the  figures)  to  the  absence  of  the  normal  proportion  of 
children  and  the  aged,  among  whom  mortality  is  greatest. 

It  is  reported  that  in  New  Zealand  a  death  rate  of  only  10  per  1000  was  found 
during  a  ten-year  period  (1887-1896),  and  was  not  accounted  for  by  any  very 
exceptional  age  distribution  (Newsholme's  Vital  Statistics,  p.  88).  Such  a  rate 
is  extraordinarily  low,  and  raises  suspicion  of  defective  counting. 


53-§2]  POPULATION  AND  SUPPLY  OF  LABOR  229 

to  the  earth;  not  that  they  are  in  fact  hkely  to  do  so,  but  that  they 
will  unless  something  prevents.  The  tendency  of  population  to 
increase  results  from  the  reproductive  instinct  and  the  love  of 
parents  for  their  offspring.  These  are  universal  and  powerful 
forces.  They  operate  without  restriction  among  animals.  Each 
species  of  animals  tries  to  multiply  at  its  maximum;  tries,  that  is, 
in  the  sense  that  it  will  do  so  unless  by  an  intervening  cause  num- 
bers are  kept  down. 

But  no  species  of  animal  can,  in  fact,  increase  at  its  maximum 
rate.  If  it  did  so,  it  would  in  time  crowd  out  all  others  and  alone 
would  occupy  the  earth.  Nor  is  man  an  exception.  A  continual 
doubling  of  his  numbers  every  quarter  of  a  century  cannot  take 
place.  Only  under  exceptionally  favoring  circumstances  can  such 
a  rate  be  long  maintained,  WTien  a  civilized  population,  having 
the  tools  and  knowledge  acquired  during  slow  centuries  of  growing 
civilization,  suddenly  comes  into  possession  of  a  new  country,  it 
finds  for  a  while  limitless  room  for  growth.  Such  was  the  situa- 
tion in  the  North  American  colonies  during  the  period  to  which 
Malthus  looked  for  an  example  of  the  possibilities  of  increase. 
Such  has  been  the  situation  of  the  people  of  the  United  States  dur- 
ing the  greater  part  of  their  history,  of  the  Canadians,  the  Aus- 
tralians, the  Argentines.  These  are  rare  cases  in  the  history  of  the 
human  species.  They  are  analogous  to  the  comparatively^  rare 
cases  where  a  new  animal  —  a  moth,  a  bird,  a  mammal  —  migrates 
into  a  country  hitherto  strange  to  it,  and  can  multiply  for  a  while 
without  finding  its  food  scarce  or  its  enemies  too  strong.  In  any 
long-settled  country  mankind  cannot  increase  at  anything  like 
the  maximum  rate.  The  fundamental  reason  for  this  is  to  be  found 
in  the  tg^ndency  to  diminishing. returns  from  the  soil.  On  any  given 
area,  that  tendency  shows  itself  for  all  agricultural  produce.  It 
may  be  counteracted  in  some  degree  by  improvements  in  the  arts. 
But  a  continuous  doubling  of  numbers  every  quarter  of  a  century 
must  eventually  encounter  the  obstacle  of  increasing  difficulty  in 
securing  the  food  supply. 

The  tendency  toward  increase  in  population  must  then  be  coun- 
teracted ;  and  it  may  be  counteracted  in  two  ways,  to  w^hich  Mai- 


230  THE  DISTRIBUTION  OF  WEALTH  [53-§3 

thus  gave  the  names  PQ^ti^^and  preventive^checks.  By  positive 
checks  he  meant  those  which  cut  down  numbers  aheady  brought 
into  the  world  —  starvation,  disease,  war,  misery  in  all  its  forms. 
By  preventive  checks  he  meant  those  which  prevent  numbers  from 
being  brought  into  the  world.  The  first  operate  thru  a  high  death" 
rate,  the  second  thru  a  low  birth  rate;  in  other  words,  the  first  thru 
an  excess  of  deaths,  the  second  thru  a  limitation  of  births. 

It  would  not  be  going  very  far  astray  to  say  that  the  extent  to 
which  one  check  or  the  other  check  prevails  is  a  test  of  the  advance- 
ment of  civilization.  The  question  is,  to  be  sure,  not  one  of  yes  or 
no,  but  one  of  more  or  less.  Mankind  rarely  exercises  the  power 
of  reproduction  to  the  full.  Some  limitation  of  births  appears  in 
ever^-society  w^hich  has  progressed  beyond  the  very  lowest  stage. 
As  civilization  advances,  more  and  more  forethought  is  exercised. 
Among  all  peoples,  there  is  some  operation  of  the  positive  check 
also.  Except  among  a  small  stratum  of  the  well-to-do,  more  beings 
are  brought  into  the  world,  even  in  the  most  advanced  countries, 
than  can  survive.  Numbers  are  kept  down  in  part  by  a  death  rate 
needlessly  high  —  that  is,  a  death  rate  above  the  minimum  from 
old  age  and  irremediable  disease.  /^The  more  there  is  limitation  of 
births,  the  higher  is  the  plane  of  ciyilizatioi;^;  the  more  excess  of 
deaths,  the  lower„.'-1 

§  3.  With  these  general  principles  in  mind,  let  a  look  be  taken 
at  the  birth  rates  and  death  rates  found  in  our  own  day  in  some 
of  the  principal  countries.  In  the  following  table  the  maximum 
birth  rates  and  the  minimum  death  rates  are  first  given,  for  ready 
comparison ;  then  follow  figures  for  the  rates  in  some  selected  coun- 
tries. The  "  doubling  period  "  means  the  number  of  years  in  which 
population  would  double  if  the  given  excess  of  births  were  steadily 
maintained. 

Note  the  wide  divergence  in  the  birth  rates.  Roumania  and 
Hungary  and  Saxony  have  rates  not  very  much  below  our  sup- 
posed maximum.  Other  countries  have  markedly  lower  rates. 
France,  which  comes  at  the  bottom,  has  a  birth  rate  about  one 
half  that  of  Roumania  and  Hungary.  On  the  other  hand,  there 
are  divergences  almost  as  striking  in  the  death  rates.    The  death 


53-§3l  POPULATION  AND  SUPPLY  OF  LABOR 


231 


rate  in  Roumania  and  Hungary  is  nearly  30  per  1000,  or  twice  as 
high  as  the  minimum.     At  the  lower  end   of  the  list,  the  death 

Birth  and  Death  Rates 
Annual  Averages  per  1000  of  Population,  for  the  Period  1891-1900 


Maximum  and  Minim.um 


Roumania 

Hungary 

Saxony 

Bavaria 

Italy 

England  and  Wales 

Sweden 

France 


Births 


45  (Max.) 


40.7 
40.6 
39.5 
36.5 
34.9 
29.9 
27.2 


Deaths 


15  (ilfira.) 


29.3 
29.9 
24.0 
25.4 
24.2 
18.2 
16.1 


Excess  of 
Births 


30  (Max.) 


11.4 
10.7 
15.5 
11.1 
10.7 
11.7 
11.1 
0.7 


Doubling 

Period 
(in  Years) 


23 


61 
65 
45 
62 
65 
59 
62 
990 


rate  sinks  to  much  more  moderate  figures  —  little  above  20  per 
1000  for  France,  and  noticeably  below  that  figure  for  England  and 
Sweden. 

In  general,  a  high  birth  rate  is  accompanied  by  a  high  death  rate. 
Such  is  the  case  in  all  the  countries  in  the  upper  part  of  the  fist 
—  in  Roumania,  Hungary,  Saxony,  Bavaria,  Italy.  This  cor- 
respondence of  high  birth  rates  with  high  death  rates  means  that 
Malthus's  warnings  and  forebodings  are  applicable.  Here  are 
countries  in  which  population  is  pressing  on  subsistence.  It  is 
tr\dng  to  increase  faster  than  the  means  of  support  make  possible, 
and  the  positi\;;e  check  is  in  operation.  Not  the  positive  check  in 
its  most  extreme  form;  the  birth  rate  is  not  at  the  maximum;  some 
limitation  of  births  there  is.  But  more  children  are  born  than  can 
survive  and  become  adults,  and  more  persons  become  adults  than 
can  survive  to  a  peaceful  old  age.  The  populations  are  ill-fed,  ill- 
clad,  ill-housed,  ill-warmed,  ill-cared-for  in  sickness.  Hungary 
and  Roumania  are  in  the  worst  case;  Saxony,  Bavaria,  and  Italy  are 
in  a  bad  case.  In  all  these  countries,  an  indispensable  condition 
for  a  permanent  improvement  in  the  condition  of  the  mass  of  the 


232  THE  DISTRIBUTION  OF  WEALTH  [53-§3 

population  is  a  lowering  of  the  birtli  rate  —  a  relaxation  of  the 
pressure  on  the  means  of  support. 

In  such  countries  the  death  rate  is  always  highest  among  the 
very  young.  Under  the  best  conditions,  the  period  of  childhood 
is  one  of  great  sensitiveness  to  physical  ills.  Even  where  the  gen- 
eral death  rate  is  very  low,  as  in  the  Scandinavian  countries  and 
in  some  Australian  states,  ten  per  cent  of  the  children  die  before 
completing  the  first  year  of  life.  Between  ten  and  fifteen  per  cent 
die  in  England,  France,  and  Massachusetts  and  New  York. 
Twenty  per  cent  and  more  fail  to  live  one  year  in  Austria  and  Hun- 
gary, twenty-five  per  cent  in  Russia;  there  are  extreme  cases  where 
one  third  of  the  babies  have  died.  Again,  taking  the  children 
under  five  years  of  age,  we  find  that  out  of  every  1000  born,  there 
died  before  attaining  the  age  of  five  :^  — 

in  Bavaria 393 

in  Austria 389 

in  Italy 378 

in  France       251 

in  England  and  Wales 249 

i  1  Sweden 222 

A  high  death  rate  among  children,  such  as  appears  in  the  coun- 
tries having  the  high  birth  rates,  means  simply  that  babes  are 
brought  into  the  world  who  cannot  survive.  It  means  suffering, 
with  never  a  chance  of  a  happy  outcome.  Those  children  who  do 
survive  and  grow  to  mature  age  must  face  low  wages  and  hard  con- 
ditions of  life;  yet  they  in  turn  marry  early  and  procreate  freely-. 
\  The  round  of  misery  goes  on  without  ceasing^  U~bt.  ~-|  7 // 
Consider  now  some  of  the  other  countries.  Note  first  that  the 
rate  of  increase  —  the  excess  of  births  over  deaths  —  is  quite  as 
high  in  England  and  Sweden  as  in  the  other  countries.  It  is  about 
11  per  1000  annually.  But  both  birth  rates  and  death  rates  are 
lower  in  Sweden  and  England.  Tho  the  birth  rates  are  higher  in 
Hungary  and  Bavaria,  their  populations  are  not  in  fact  increasing 

1  Figures  of  this  sort  can  be  found  in  any  book  on  vital  statistics.  Those  here 
cited  may  be  found  in  Newsholme's  Vital  Statistics,  p.  130  (taken  from  Bertillon), 
Bailey's  Modern  Social  Conditions,  p.  224,  and  the  Massachusetts  Registration 
Reports.  For  a  comparative  survey,  with  figures  for  the  United  States,  see  E.  B. 
Phelps,  in  Publications  American  Statistical  Association,  December,  1910. 


53-§3]  POPULATION  AND  SUPPLY  OF  LABOR  233 

faster.  They  are  trying  to  increase,  but  are  kept  down  by  the 
positive  check.  In  England  and  Sweden  the  people  are  not  trying 
to  increase  so  fast;  the  birth  rate  is  lower;  the  preventive  check  is 
in  operation  to  a  greater  degree.  Obviously,  the  condition  of  Eng- 
land and  Sweden  is  much  the  happier.  They  escape  an  immense 
amount  of  avoidable  suffering.  If  their  birth  rates  were  to  rise 
to  those  of  the  other  countries,  their  death  rates  would  almost 
surely  go  up  in  some  corresponding  degree.  Numbers  would  not 
increase  more  rapidly,  but  would  simply  be  prevented  from  in- 
creasing thru  a  different  and  more  miserable  process. 

The  fact  that  population  advances  with  some  rapidity  in  these 
happier  countries,  and  yet  does  not  bring  with  it  high  death  rates, 
is  accounted  for  in  various  ways.     In  Sweden  it  is  due  chiefly  to 
emigration.     Such  figures  do  not  necessarily  state  what  is  the 
actual  gain  in  numbers  in  the  several  countries;  they  indicate  only 
what  gain  would  have  taken  place  by  internal  growth.     The  final ,] 
effect  on  nmnbers  depends  also  on  the  inflow  and  outflow  —  on  j 
imjnigration  and  emigration.     The  emigration  from  Sweden  dur-  \ 
mg  the  period  under  consideration  was  large  relatively  to  the  popu- 
lation.    Except  for  this,  either  the  death  rate  would  have  been 
higher  or  the  birth  rate  lower;  for  Sweden  is  not  a  country  with 
such  possibilities  of  expanding  production  as  to  enable  its  numbers 
to  grow  as  they  would  have  done  by  natural  increase  alone.     It  is 

to  be  noted  that  some  of  the  other  countries  also  have  found  an 

outlet  in  emigration  —  notably  Italy.  Had  it  not  been  for  a 
great  stream  of  emigration,  Italy  also  would  have  had  a  death  rate 
even  higher  than  that  which  she  shows;  or  else  her  birth  rate  would 
have  been  smaller. 

England,  too,  has  found  some  outlet  in  emigration;  but  not  to  a 
great  extent  during  the  decade  to  which  the  figures  apply.  In  the 
main,  her  excess  of  births  over  deaths  has  meant  an  actual  increase 
of  the  number  in  the  country.  Numbers  have  been  able  to  grow 
because  England's  powers  of  production  have  kept  pace  with  them.  I 
This  could  hardly  ha\'e  been  the  case  if  England  had  supported 
them  and  supplied  them  with  raw  materials  from  her  own  soil. 
But  she  is  a  great  manufacturing  country,  obtaining  food  and  ma- 


234  THE  DISTRIBUTION  OF  WEALTH  [53-§3 

terials  in  exchange  for  exports  of  manufactures  as  to  which  there  js_ 
no  obstacle  from  diminishing  returns.  Exchange  of  this  kind  was 
the  basis  of  England's  advance  in  population  and  wealth  during 
the  nineteenth  century.  So  long  as  it  continues,  and  continues  for 
expanding  numbers,  she  can  maintain  a  high  birth  rate  and  yet 
a  low  death  rate.  When  growth  of  this  sort  slackens  —  when  it 
becomes  more  difficult  to  buy  ever  increasing  food  supplies  by  ex- 
porting manufactured  goods  —  England  must  either  have  a  lower 
birth  rate  or  a  higher  death  rate.  The  former  alternative  will 
almost  certainly  be  chosen;  indeed,  a  slackening  in  the  rate  of 
growth  has  already  shown  itself.  As  will  appear  more  fully  in  the 
sequel,  this  is  the  mode  in  which  the  populations  of  all  advanced 
countries  are  likely  to  accommodate  themselves  to  conditions  of 
greater  pressure.  ' 

France  is  the  classic  country  of  the  preventive  check.  Her  popu- 
lation has  been  practically  stationary  for  several  decades;  or  rather, 
it  has  failed  to  grow  by  natural  increase.  Such  slight  gain  in  total 
numbers  as  appeared  has  been  due  to  immigration.  The  death 
rate  in  France  is  not  as  low  as  it  might  well  be.  In  part,  it  is  true, 
her  comparatively  high  death  rate  may  be  accounted  for  by  the 
mere  fact  of  her  population  having  been  for  some  time  stationary. 
This  brings  about  an  age  distribution  with  a  large  proportion  of 
older  persons,  among  whom  the  death  rate  must  be  higher.  But 
it  is  also  true  that  France,  tho  a  great  and  prosperous  country,  yet 
has  —  what  country  has  not?  —  strata  in  her  population,  both 
industrial  and  rural,  in  which  the  conditions  of  life  are  hard  and  the 
deaths  are  largely  due  to  preventable  causes.  None  the  less,  her 
birth  rate  on  the  whole  is  low,  and  her  population  does  not  press 
hard  on  her  resources.  Especially  in  the  rural  regions,  the  popu- 
lation of  France  is  eminently  thrifty,  self-respecting,  careful  of  the 
future;  not  in  every  respect  a  condition  thoroly  satisfactory,  but 
vastly  happier  and  more  prosperous  than  that  of  Italy,  Hungary, 
or  Saxony. 

For  the  United  States  as  a  whole,  trustworthy  figures  of  births 
and  deaths  are  lacking.  The  Census  authorities  state  a  birth  rate 
of  35.1  per  1000  for  this  country  in  the  decade  1890-1899,  and  a 


53-§3] 


POPULATION  AND  SUPPLY  OF  LABOR 


235 


death  rate  of  17.7.  But  both  figures  are  open  to  suspicion.  The 
death  rate  is  stated  on  the  basis  of  inadequate  census  returns;  and 
the  birth  rate  rests  on  compHcated  calculations,  in  which  the  uncer- 
tain death  rate  enters.  It  is  to  be  expected  that  a  country  whose 
opportunities  for  economic  growth  are  such  as  the  United  States 
possesses,  should  have  a  high  birth  rate;  while  general  prosperity 
and  ease  would  lead  one  to  expect  a  relatively  low  death  rate.  But  , 
the  United  States  is  a  very  heterogeneous  country,  and  any  general 
averages  for  its  vital  statistics,  even  if  based  on  accurate  figures, 
would  be  of  uncertain  significance.  The  birth  rates,  for  example,  ' 
of  the  colored  population,  especially  in  the  South,  are  high;  the 
death  rates  here  are  also  high.  The  colored  population  is  in  a  con- 
dition analogous  to  that  of  Roumania  and  Hungary.  The  white 
population  of  the  Soutk  also  has  a  high  birth  rate,  and  a  compara- 
tively high  death  rate,  tho  by  no  means  so  high  as  that  for  the 
negroes.  In  the  Central, and  Western  parts  of  the  country  the 
birth  rate  probably  is  relatively  high,  the  death  rate  low.  In  the 
Eastern  states,  and  especially  New  England,  the  birth  rate  is  com- 
paratively low.  Thus  in  Massachusetts,  in  which  state  alone  ac- 
curate registration  has  been  continuously  maintained,  the  birth 
rate  has  been  for  some  decades  not  far  from  25  per  1000.  The 
death  rate  in  that  state  has  been  low,  from  17  to  19  per  lOOO.^  But 
here  again  the  population  is  not  homogeneous,  and  the  figures  need 
to  be  interpreted.  Massachusetts  has  had  a  steady  flow  of  immi- 
grants; hence  her  population  includes  an  unusual  proportion  of  peo- 
ple in  the  prime  of  life,  which  in  part  accounts  for  the  low  death 
rate.     On  the  other  hand,  there  is  a  marked  dift'erence  between  the 

1  The  birth  rates  and  death  rates  in  Massachusetts   have  been  as  follows, 
arranged  for  quinquennial  periods: — 


5  years  ending  1880 
5  years  ending  1885 
5  j'ears  ending  1890 
5  years  ending  1895 
5  years  ending  1900 
5  yoars  ending  1905 


Births 


Deaths 


24.2 

18.8 

25.0 

19.8 

25.8 

19.4 

27.6 

19.8 

27.0 

18.0 

24.2 

16.4 

236  THE  DISTRIBUTION  OF  WEALTH  [53-§4 

foreign  born  and  the  native  born.  The  birth  rate  is  very  much 
higher  among  the  foreign  born,  while  among  the  native  born  it  is 
remarkably  low  —  a  phenomenon  of  which  more  will  be  said  pres- 
ently. The  variations  between  different  parts  of  the  United  States 
are  as  great  as  those  between  different  European  countries. 

§  4.  High  birth  rates,  high  death  rates,  backward  industrial 
conditions,  low  wages  —  these  commonly  go  together.  But 
which  is  cause  and  which  is  effect?  The  unqualified  Malthusian 
view  is  that  the  pressure  of  population,  indicated  by  a  high  birth 
rate,  is  the  cause  from  which  all  the  evils  flow,  and  that  the  one  ef- 
fective m,ea,ris  of  improvement  is  a  lowering  of  the  birth  rate.  But 
the  situation  is  not  quite  so  simple  as  this. 

High  birth  rates  and  misery  are  largely  interacting  causes.  A 
high  birth  rate  commonly  ^^afijp,  in  an  old  country,  mi^^r}-;  and 
migfiry,  in  turn,  often  in£j;g§^s  the  birth  rate.  When  a  people  is 
poor  and  sees  no  prospect  of  escape  from  poverty,  it  is  in  danger 
of  becoming  demoralized.  Multiplication  takes  place  without 
thought  of  the  future,  since  the  future  seems  in  any  case  without 
hope.  That  very  multiplication  shuts  the  door  to  hope.  In  mod- 
ern times,  such  a  fatal  round  of  interacting  causes  often  appears 
in  manufacturing  districts  where  there  is  much  employment  of 
women  and  children:  as,  for  instance,  in  the  textile  districts  in 
Saxony  of  which  Chemnitz  is  the  center.  There  women  and  chil- 
dren offer  themselves  for  employment  because  people  are  many  and 
wages  are  low.  The  very  opportunity  for  securing  employment, 
on  the  other  hand,  promotes  multiplication,  since  the  income  of  the 
family  is  eked  out  by  the  earnings  of  mother  and  offspring.  Where 
such  conditions  have  established  themselves,  the  way  of  escape  to 
something  better  is  hard  to  find.  The  causes  of  demoralization 
and  niisery  become  cumulative.  Even  in  countries  where  the  gen- 
eral conditions  are  good,  there  is  commonly  a  low-lying  stratum  of 
the  population  in  which  there  are  high  birth  rates,  high  death  rates, 
pressure  for  employment,  low  wages  —  connected  phenomena,  yet 
no  one  the  certain  cause  of  the  other. 

None  the  less,  it  is  clear  that  restraint  on  the  increase  of  numbers 
is  one  essential  condition  of  improvement.     Stated  in  this  way,  the 


53-§5]  POPULATION  AND  SUPPLY  OF  LABOR  237 

Malthiisian  propositijsiiisJiiiipregnable.  A  limitation  of  numbers 
is  not  a  cause  of  bigli  wages,  but  it  is  a  condition  oi  tbe  maintenance 
pf  hi^h  wage^.    y^ 

High  wages  depend  fundamentally  on  high  productivity  of  in- 
dustry. In  new  countries,  where  the  increase  of  population  is  not 
confronted  by  limited  natural  resources,  and  where  capital  also  in- 
creases rapidly,  the  laborers  may  multiply  fast  without  having  to 
face  harsh  terms.  A  long  period  may  elapse  before  signs  of  pres- 
sure appear.  But  in  countries  already  well  peopled,  the  fundamen- 
tal limitation  from  diminishing  returns  on  land  is  ever  present. 
Unless  there  be  some  exercise  of  the  preventive  check,  no  measure 
toward  general  improvement  can  be  effective. 

But  mere  exercise  of  the  preventive  check  can  accomplish  noth- 
ing.   Only  if  there  be  the  other  conditions  needful  for  prosperity 

—  improvements  in  the  arts,  increasing  capital,  greater  produc- 
tivity of  industry  —  will  the  general  social  income,  and  wages  as 
part  of  that  income,  show  a  tendency  to  rise.  Then  restraint  on 
multiplication,  tho  not  in  itself  a  cause  of  gain,  will  enable  the  gain 
to  be  maintained.  It  is  certain  that  if  population  increases  at  its 
maximum  rate,  or  anything  like  that  maximum,  high  birth  rates 
will  bring  not  only  high  death  rates,  but  low  wages  also.  But  if 
there  be  forces  in  operation  which  raise  the  productivity  of  indus- 
try, a  lowered  bhth  rate  will  enable  more  favorable  conditions  to 
be  attained  and  held. 

§  5.  The  standard  of  living  is  often  spoken  of  as  the  fundamental 
cause  determining  wages.  There  is  a  sense  in  which  it  is  a  fun- 
damental cause.  Yet  it  acts,  not  directly,  but  thru  its  effects  on 
numbers.  A  high  standard  of  living  does  not  in  itself  increase 
wages.  It  may  serve  to  lower  or  to  keep  low  the  birth  rate,  and 
thereby  create  one  of  the  conditions  on  which  maintenance  of  high 
wages  usually  depends.     But  unless  other  conditions  are  present 

—  a  large  demand  for  laborers,  which  comes  at  bottom  from  a  large 
productiveness  of  industry  —  a  high  standard  of  living  brings 
nothing  to  pass. 

There  are  curious  fallacies  on  this  subject.  A  notion  is  preva- 
lent among  many  workmen  of  the  upper  tier  (mechanics  and  the 


238  THE  DISTRIBUTION  OF  WEALTH  [o3-§5 

like)  that  cheap  Hving  is  bad  for  them  and  free  expenditure  good. 
They  suppose  that  if  they  economize  (use  cheaper  food,  for  exam- 
ple) advantage  will  somehow  be  taken  of  them  and  their  wages  re- 
duced; whereas  if  they  "live  well,"  their  wages  will  be  kept  up. 
Hence  persons  who  propose  economical  ways  of  using  and  cooking 
materials  for  food  are  suspected  of  being  in  a  covert  conspiracy  to 
bring  down  wages.  Nothing  is  more  irrational.  Every  way  of 
getting  as  much  as  possible  with  your  income  —  of  so  directing 
expenditure  that  the  maximum  of  utility  is  secured  for  each  out- 
lay —  serves  to  increase  the  effectiveness  of  the  forces  which  make 
for  prosperity.  What  laborers  get  depends  in  no  direct  way  on 
what  they  spend,  or  on  their  standard  of  expenditm-e.  It  depends 
on  their  numbers  as  one  factor;  and  the  standard  of  living  has  an 
effect  on  their  wages  only  in  so  far  as  it  has  an  effect  on  their  num- 
bers. Some  economists  have  been  no  less  guilty  of  confusion  on 
this  topic  than  the  laborers  themselves.  They  have  discussed  the 
standard  of  living  as  if  it  were  a  force  acting  directly;  whereas  it 
acts  only  indirectly. 

This  proposition,  like  so  many  others  in  economics  that  are  es- 
sentially true,  needs  some  qualification.  Tho  a  high  standard  of 
living  exercises  an  influence  on  wages  chiefly  thru  its  effect  on  num- 
bers, it  does  have  some  effect  also  on  the  bargaining  process.  The 
first  step  in  the  settlement  of  the  wages  of  hired  laborers  is  a  con- 
tract with  an  employer.  All  sorts  of  factors  bear  on  the  contract; 
not  only  labor  organizations  —  of  which  more  presently  ^  —  but 
estabHshed  traditions  as  to  what  are  "fair  wages"  or  "Hving 
wages."  These  are  vague  and  often  question-begging  phrases; 
men's  notions  of  what  is  just  pay  or  living  pay  are  usually  settled 
simply  by  the  rates  to  which  they  are  habituated.  But  the  fact 
of  habituation  counts  as  one  of  the  elements  in  bargaining.  An 
established  standard  of  living  will  cause  workmen  to  stick  more 
stubbornly  to  a  demand  for  what  they  regard  as  decent  wages. 
Within  the  debatable  ground  subject  to  the  higgling  of  the  market, 
a  high  standard  of  living  thus  may  have  some  direct  effect  on  the 
outcome. 

»  See  Cnapter  57. 


53-§6]  POPULATION  AND  SUPPLY  OF  LABOR  239 

Tho  a  high  standard  of  living,  showing  itself  in  a  lowered  birth 
rate,  establishes  itself  with  difficultj^  in  a  population  steeped  in 
poverty,  the  difficulty  of  raising  the  standard  is  not  so  great  as 
many  of  the  older  writers  supposed.  They  thought  that  a  real 
advance  could  come  only  by  some  sudden  uplift,  giving  time  for 
the  establishment  of  new  habits.  From  this  point  of  view,  the 
outlook  gave  little  hope;  for  nothing  is  more  difficult  to  bring  about 
than  a  sudden  change  in  social  and  material  conditions.  Happily, 
this  opinion  has  been  shown  bj^  the  course  of  recent  history  to  be 
unfounded.  During  recent  generations,  there  has  been  in  the 
more  advanced  countries  a  slow  and  gradual  improvement  in  wel- 
fare, and  with  it  a  slow  and  gradual  fall  in  the  birth  rate.  All  the 
leading  countries  show  a  declining  birth  rate,  side  by  side  with  a 
death  rate  declining  still  more.  The  change  is  most  unmistakable 
(as  will  presently  appear)  among  the  well-to-do,  but  it  appears  also 
in  the  upper  strata  of  the  workingmen,  and,  more  faintly,  among 
the  lower  tiers  of  the  laborers.  It  is  gradually  affecting  all  classes 
and  all  countries.  It  is  both  a  cause  and  a  result  of  greater  pros- 
perity, and  both  a  cause  and  a  result  of  a  higher  standard  of  liv- 
ing. It  bids  fair  to  have  more  and  more  important  consequences 
as  time  goes  on. 

§  6.  The  birth  rate  in  all  civilized  countries  has  shown  a  decline 
since  the  middle  of  the  nineteenth  century.  Thus  in  England  it 
was  35  per  1000  in  the  decade  from  1850  to  1860;  in  1900-1905 
it  was  about  27  per  1000.  In  France  during  the  same  period 
it  went  down  from  26  per  1000  to  21.  In  Germany  the  decline 
was  less  striking,  but  none  the  less  unmistakable,  from  36  or 
37  to  33  or  34.  There  is  evidence  that  a  similar  change  went  on  in 
the  United  States  thru  the  nineteenth  century. ^  In  other  words, 
there  has  been  an  application  of  what  INIalthus  called  the  preven- 

1  Figures  on  this  subject  can  be  found  in  anj'  statistical  compendium.  For  a 
careful  discussion  and  selected  figures,  see  MajT's  Statistik  und  Gesellschaftslehre, 
Vol.  Ill,  pp.  113-114;  and  for  the  United  States  W.  F.  Willcox's  paper  inthePuWi- 
cations  American  Statistical  Association,  1911,  No.  2.  Professor  Willcox  has  brought 
out  the  surpri.sing  fact  that  the  decUne  in  the  United  States  has  not  been  of  recent 
origin,  but  has  gone  on  continuously  since  1800.  See  also  two  admirable  papers, 
one  by  Messrs.  Newsholme  and  Stevenson,  the  other  by  Mr.  Yule,  in  the  Journal 
Royal  Statistical  Society,  1906,  pp.  34,  88. 


240  THE  DISTRIBUTION  OF  WEALTH  [53-§6 

tive  check.  But  the  change  has  taken  place  by  a  process  different 
from  that  which  Malthus  recommended  and  expected.  Mai  thus 
desired  that  the  time  of  marriage  should  be  postponed  and  that 
marriages  should  take  place  at  a  later  age.  Were  this  done,  the 
marriage  rate  would  decline,  because  of  the  deaths  of  some  persons 
who  might  have  married;  a  change,  however,  which  would  be 
slight  unless  the  postponement  was  very  marked.  The  birth  rate 
too  would  decline  somewhat,  because  of  the  shorter  duration  of 
fertile  married  life  and  because  of  the  lesser  fertility  of  the  later  age 
periods.  But  it  is  not  by  these  measurable  physiological  influences 
that  the  result  desired  by  Malthus  has  come  to  pass.  ■sJCitg^.^iJn 
cause  has  been  deliberate  interference  with  the  natural  and 
biological  processes.  The  marriage  rate  in  most  countries,  tho  it 
shows  a  slight  tendency  to  decline,  has  varied  little.  It  is  usually 
not  far  from  8  per  1000,  and  very  nearly  the  same  in  France,  in 
Germany,  and  in  England ;  yet  these  countries  have  very  different 
birth  rates.  Nor  has  the  average  age  at  marriage  shown  a  sensible 
change.  It  is  the  number  of  children  per  marriage,  varying  tho  it 
does  from  country  to  country,  that  tends  to  become  smaller  in  al- 
most all  countries;  unless  indeed,  as  in  France,  it  has  reached  a 
minimum  where  it  just  balances  the  number  of  deaths.  There  is 
no  question  that  this  general  situation  —  marriage  rates  virtually 
stationary  and  yet  declining  birth  rates  —  is  due  to  deliberate 
abstention  from  propagation.  Married  couples  have  fewer  chil- 
dren than  before,  by  deliberate  intent.  The  tendency  is  more 
marked  in  some  countries  than  in  others;  more  marked,  for  ex- 
ample, in  Protestant  countries  than  in  Catholic.  It  appears  among 
the  well-to-do  more  unmistakably  than  among  the  poor,  yet  it  is 
spreading  to  all  classes.  It  raises  some  large  questions,  both  as 
regards  the  general  problems  of  population  and  as  regards  those  of 
social  stratification.  To  these  questions  we  shall  turn  in  the  next 
chapter. 


CHAPTER  54 
Population,  continued 

Section  1.  Differences  between  social  strata  in  birth  rates,  and  their  relation 
to  varj'ing  standards  of  living,  241 — Sec.  2.  The  main  cause  of  the 
general  tendencj'  to  lower  birth  rates  is  social  ambition.  Its  connection 
with  private  property  and  individualism.  Illustration  from  native-born 
and  immigrants  in  the  United  States,  245  —  Sec.  3.  Is  the  preventive 
check  being  carried  too  far?    Eugenics  and  race  suicide,  249. 

§  1.  Between  the  several  social  classes  or  non-competing  groups 
there  are  variations  in  birth  rates  and  death  rates  no  less  marked 
tBaiT  the  variations  between  different  countries.  Differences 
within  any  one  country  are  even  more  significant  then  the  differ- 
ences between  countries,  for  they  bring  into  fuller  light  the  nature 
of  social  stratification  and  the  connection  between  standards  of 
living  and  ruling  rates  of  income.  The  statistical  evidence  on  this 
part  of  the  subject  is  comparatively  meager;  on  the  other  hand, 
the  observation  of  everyday  life  goes  far  to  make  plain  the  general 
situation. 

First,  consider  the  nature  of  the  statistical  evidence.  Marriage 
takes  place  later  among  the  well-to-do  classes  than  the  working- 
men.  The  average  age  at  marriage  of  bachelors  and  spinsters  {i.e. 
for  first  marriages)  was  found  to  be  in  Great  Britain,  in  1890:  ^  — 


Miners 

Artisans 

Shopkeepers 

Professional  and  independent  classes 


1  The  often-cited  figures  of  Ogle,   in  Journal  Royal   Statistical  Society,   1890, 
pp.  274-275. 

241 


242 


THE  DISTRIBUTION  OF  WEALTH 


[54-§l 


Another  indication  of  the  same  situation  is  found  in  the  fact  that, 
in  Great  Britain  at  the  same  date,  out  of  every  1000  miners  who 
married,  704  were  under  25  years  of  age,  while  out  of  every  1000 
persons  of  the  professional  and  independent  classes  only  151  were 
under  25. 

The  later  age  of  marriage  in  itself  tends  to  bring  a  smaller  birth 
rate  among  the  well-to-do.  But  the  birth  rate  is  smaller  to  a  de- 
gree far  beyond  what  is  explained  by  this  circumstance  alone. 
The  discrepancies  between  the  social  classes  are  striking.  In  Ber- 
lin an  elaborate  examination  showed  that  the  married  women  in 
the  poorest  quarters  had  nearly  twice  as  many  births  as  those  in 
the  richest,  and  that  the  inverse  relation  between  birth  rate  and 
prosperity  held  thruout  the  scale.  For  every  1000  married  women 
of  child-bearing  age  (15-45)  there  were  in  1900:  — 

236  births  in  the  poor  st  quarters 
212  births  in  the  next  poorest  quarters 
191  births  in  the  next  poorest  quarters 
180  b-rths  in  the  next  poorest  quarters 
161  births  in  the  next  poorest  quarters 
127  bi  ths  in  the  richest  quarters 

It  is  not  often  that  direct  comparison  of  this  kind  (between  the 
number  of  married  women  and  of  births)  is  feasible.  But  it  has 
been  frequently  shown  that  in  comparison  with  the  total  number 
of  women  (married  and  unmarried)  of  child-bearing  age,  the  num- 
ber of  births  is  large  for  the  poor,  small  for  the  rich.  This  result 
appeared  for  all  the  German  cities  from  the  investigation  just  re- 
ferred to;  thus,  to  take  one  example,  in  Hamburg  the  births  per 
1000  women  of  child-bearing  age  (15-45)  were  59  in  the  richest 
quarters,  151  in  the  poorest  quarters.  An  older  and  much-quoted 
set  of  figures  for  various  European  cities  gave  the  number  of  births 
(per  1000  women  aged  15-50)  thus:  — 

London 


Very  poor  quarters 

Poor 

Comfortable     .     . 
Very  comf  oi  table  . 

Rich 

Very  rich     .     .     . 


Pabis 

Berlin 

Vienna 

108 

157 

200 

95 

129 

164 

72 

114 

155 

65 

96 

153 

53 

63 

10- 

34 

47 

71 

147 
140 
107 
107 
87 
63 


54-§l]  POPULATION  (Continued)  243 

In  Boston  the  average  birth  rate  for  the  whole  city  was,  in  1900- 
1904,  27  (per  1000  inhabitants);  in  the  ward  inhabited  chiefly  by 
the  rich  it  was  only  13  per  1000;  in  wards  of  the  poor  it  was  from 
28  to  36  per  1000.  In  the  ward  where  the  newly  arrived  Italians 
cluster,  it  was  46. ^ 

It  is  part  of  the  same  phenomena  that  in  the  United  States  the 
birth  rate  is  much  lower  among  the  native  born  than  among  the 
foreign  born.  The  native  born  are  on  the  whole  those  of  larger 
incomes  and  better  social  station.  In  Michigan,  for  a  period  of 
25  years,  from  1870  to  1895,  the  number  of  children  per  1000  women 
between  the  ages  of  15  and  45  was  for  the  native-born  women  about 
120  (ranging  from  111  to  127)  and  for  the  foreign-born  women 
about  230  (ranging  from  221  to  235). 

Similar  figures  as  to  varying  death  rates  are  not  easy  to  get;  but 
they  are  not  needed  to  show  the  salient  facts.  The  higher  death 
rate  among  the  poor,  especially  for  infants  and  children,  is  too  sadly 
familiar.  Every  poor  quarter  swarms  with  children,  and  in  every 
poor  quarter  the  chance  of  survival  to  maturity  is  less  than  in  a 
well-to-do  quarter.2 

These  variations  are  the  evidences  and  the  consequences  of  dif- 
ferences in  the  standard  of  living;  and  they  bear  the  same  relatioiT 
to  the  standards  of  living  among  social  groups  as  the  similar  varia- 
tions do  to  the  standards  of  living  in  different  countries.  The  rea- 
son for  low  remuneration  in  any  given  group  is  that  the  numbers  in 
that  group  are  large  relatively  to  the  demand  for  the  services 
yielded ;  in  other  words,  because  the  marginal  utility  or  vendibility 

1  The  figures  for  Berlin  and  Hamburg  are  from  Momberfc,  Siudien  zur 
Bevolkerunasheu'eginig  in  Deutschland,  pp.  149,  150.  An  excellent  survey  of  all 
the  e^adenoe  on  this  subject  for  various  countries  is  ?iven  in  Mombert's  book.  The 
figures  for  Paris,  Berlin,  etc.,  are  Bertillon's,  in  the  Bulletin  de  Vlnstitut  Internal, 
de  Statistique,  Vol.  XI,  Part  2,  p.  163;  those  as  to  Boston  from  Wolfe,  The  Lodging 
House  Problem  in  Boston,  p.  128.  Figures  such  as  Bertillon's  exaggerate  the  differ- 
ences, because  rich  quarters  contain  many  unmarried  women  servants,  whose  pres- 
ence brings  down  the  birth  rate  in  comparison  with  the  total  number  of  women  of 
child-bearing  age. 

2  The  following  figures  are  for  London  in  1903.  They  give  the  birth  and  death 
rates  by  groups  of  the  population  of  London,  Group  1  being  the  poorest,  Group  6  the 
richest  (the  test  of  riches  and  poverty  being  in  this  case  the  proportion  of  servants 
kept) .     Both  crude  and  corrected  rates  are  given  for  births  and  for  deaths ;  the  crude 


244 


THE  DISTRIBUTION  OF  WEALTH 


[54-§  1 


of  the  group's  members  is  low.^  But  the  numbers  in  any  group 
remain  large  or  small  according  to  multiplication  within  the  group. 
Not  solely,  it  is  true,  according  to  this  factor;  there  is  transfer  from 
group  to  group,  and  especially  some  swelling  of  the  numbers  in  the 
higher  ranks  thru  inflow  from  the  lower.  Yet  in  the  main  each 
group  is  recruited  from  its  own  members.  Certainly  in  the  low- 
est of  all,  that  of  unskilled  laborers,  growth  proceeds  almost  wholly 
from  within.  The  wages  of  day  laborers  are  low  because  there  are 
so  many  of  them ;  and  there  are  so  many  of  them  because,  notwith-  ^ 
standing  low  wages,  they  continue  to  marry  and  multiply,  and 
as  a  rule  marry  early  and  multiply  fast. 

Here,  again,  the  relation  between  standard  of  living  and  wages 
is  not  direct,  but  indirect.  The  mere  fact  that  the  well-to-do  are 
habituated  to  comfortable  living  and  wish  to  maintain  comfort- 
able living,  does  not  make  earnings  large.  But  the  fact  that  there 
are  comparatively  few  physicians,  lawyers,  architects,  engineers, 
business  men  of  the  upper  tier  —  this  serves  to  keep  high  the  in- 
comes of  the  class.  The  wages  of  common  laborers  are  not  low 
because  they  are  used  to  coarse  food  and  cheerless  living;  it  is  the 
maintenance  of  their  numbers  in  face  of  these  dismal  conditions 
that  keeps  wages  low.  There  is  a  correlation  between  standard  of 
living,  birth  rates,  supply  of  workers,  and,  finally,  earnings. 

It  is  possible  to  conceive  of  the  standard  of  living  as  not  influenc- 
ing wages  thru  the  ultimate  effect  on  numbers,  but  as  fixing  wages 

rates  being  per  1000  of  population,  and  the  corrected  rates  taking  account  of  vari- 
ations in  marital  conditions  and  of  the  distribution  of  the  population  by  age  groups. 


Group  1  (poorest) 
Group  2  .  .  . 
Group  3  .  .  . 
Group  4  .  .  . 
Group  5  .  .  . 
Group  6  (richest) 


Crude 
Birth  Rate 


35.0 
38.3 
26.0 
25.9 
25.1 
18.2 


Crude 
Death  Rate 


18.4 
14.4 
14.6 
12.1 
14.8 
13.0 


Corrected 
Birth  Rate 


31.6 
25.8 
25.6 
25.5 
25.3 
20.4 


Corrected 
Death  Rate 


19.1 
15.0 
15.3 
12.7 
15.5 
14.6 


See  the  paper  by  Newsholme  and  Stevenson,  already  referred  to,  in  Journal  Royal 
Statistical  Society,  1906,  p.  71. 

>  See  above,  Chapter  47,  §§  1,  2. 


54-§2]  POPULATION   {Continued)  245 

at  a  precise  point  —  as  having  a  determinative  influence  similar  to 
that  which  cost  of  production  has  upon  the  long-run  value  of  com- 
modities. Thus  a  given  group  —  say  that  of  the  upper  set  of 
manual  workmen,  the  mechanics  and  skilled  craftsmen  —  may  be 
supposed  to  have  a  specific  standard  of  living,  to  multiply  fast  when 
earnings  exceed  the  amount  so  defined  and  to  check  multiplication 
when  earnings  fall  below  it.  But  such  a  conception  of  the  situation 
is  true  to  the  facts  only  in  a  very  vague  and  uncertain  way.  Other 
circumstances  than  a  foreseen  and  calculated  rate  of  remuneration 
affect  marriages  and  births.  The  influence  of  the  purely  economic 
motives  is  irregular,  often  only  half-conscious.  They  are  more 
likely  to  serve  in  checking  multiplication  than  in  increasing  multi- 
plication; they  are  more  likely  to  keep  wages  from  declining  than 
to  prevent  them  from  rising.  ^Mien  a  moderate  increase  of  wages 
in  a  given  group  is  made  possible  by  greater  demand  for  its  serv- 
ices, it  is  not  to  be  thought  probable  that  higher  birth  rate  and 
internal  growth  will  check  the  advance.  It  is  much  more  likely 
to  be  kept  within  limits  by  seepage  from  without  —  by  the  success 
of  some  individuals  from  other  groups  in  finding  their  way  into  the 
more  prosperous  employment.  Not  only  for  the  population  at 
large,  but  also  for  the  several  classes  within  it,  it  is  safer  to  say  that 
a  high  standard  is  a  condition  of  the  maintenance  of  high  earn- 
ings than  that  it  is  a  cause. 

§  2.  The  general  decline  of  the  birth  rate  in  advancing  coun- 
tries; the  accentuation  of  that  decline  among  the  well-to-do;  the 
probability,  almost  certainty,  that  v/ith  wider  diffusion  of  pros- 
p>erity  the  tendency  will  spread  more  and  more  to  all  classes  —  all 
this  is  due  mainly  to  sQLial„and  indystcidi-aaibition.  Some  writers 
have  discussed  the  change  as  if  it  were  automatic,  as  if  the  lower 
birth  rate  among  the  well-to-do  were  the  natural  and  necessary 
consequence  of  their  having  a  larger  income.  The  connection 
between  income  and  birth  rate  is  the  other  way ;  rising  prosperity  is 
rather  the  effect  than  the  cause  of  declining  pressure.  The  funda- 
mgiiig,!  cause  is  the  wish  of  eac^  family  to  promote  its  own  material 
welfare.  Malthus  spoke  of  the  desire  of  each  individual  to  im- 
prove his  condition  as  the  vis  medicatrix  of  society.     Certainly  with 


246  THE  DISTRIBUTION  OF  WEALTH  [54-§2 

reference  to  the  growth  of  population,  he  spoke  with  truth.  When 
some  chance  of  better  conditions  is  visible;  when  a  better-paid  oc- 
cupation, education,  some  savings  and  some  accumulation  appear 
within  reach ;  when  it  is  seen  that  more  mouths  to  feed  mean  a  les- 
sening possibility  of  utilizing  such  an  opportunity  —  then  the  pro- 
pensity to  multiplication  as  more  and  more  held  in  check.  The 
causes  of  the  declining  birth  rate  are  to  be  found  in  the  intellectual 
and  material  forces  which  have  so  wonderfully  stirred  the  people 
of  western  civilization  during  the  last  century:  the  spread  of  edu- 
cation, newspapers  and  books;  cheap  mqvemgnt  by  railway  and 
steamship;  the  quickening  of  stagnant  populations  by  the  new 
modes,  of  employment,  by  large-scale  production  and  the  factory 
system,  by  the  changes  thru  emigration.  Not  all  of  these  forces 
have  been  steadily  at  work  in  the  same  direction.  The  factory 
system  has  seemed  at  times  simply  demoralizing,  tho  in  the  long 
run  it  also  has  had  an  awakening  and  uplifting  effect.  Where  the 
ownership  of  land  has  been  widespread,  or  the  conditions  of  tenure 
secure,  the  agricultural  population  has  responded  most  surely  to 
the  new  opportunities,  as  in  France,  the  United  States,  western 
Germany.  Where  the  agricultural  workers  are  divorced  from  the 
land,  as  in  eastern  Germany,  England,  southern  Italy,  Austria, 
and  Hungary,  they  have  needed  a  stirring  from  the  other  world, 
thru  emigration,  to  rouse  them  to  the  outlook  for  improvement. 
Thruout,  it  has  been  awakened  ambition  in  the  ittdhddji&l  that  has 
caused  the  standard  of  living  to  rise. 

Malthus was  induced  to  write  on  the  question  of  population  be- 
cause he  believed  that  here  was  an  insuperable  obstacle  to  Utopian 
schemes.  His  followers  steadily  maintained  that  the  tendency  of 
population  to  outrun  subsistence  was  an  obstacle  in  the  way  of 
socialism.  The  obstacle  may  not  be  insuperable;  but  it  is  certain 
that  in  a  socialistic  society  it  will  have  to  be  overcome  in  a  way 
very  different  from  that  which  has  in  fact  appeared  in  modern 
communities.  On  tlie  one  hand,  inequality  and  the  familiar  spec- 
tacle of  a  higher  economic  and  social  stratum ;  the  stimulus  of  self- 
interest,  on  the  other  hand,  for  one's  self  and  one's  children  — 
these  are  the  factors  which  have  limited  the  movement  of  popula- 


64r-§2] 


POPULATION  (Continued) 


247 


tion,  spurred  ambition  and  imposed  restraint,  and  so  sustained  the 
advancement  and  dijffusion  of  material  well-being.  Individualism 
is  at  the  root  of  the  phenomenon.  *^ 

All  these  individualistic  forces  have  been  most  strongly  at  work 
in  the  United  States.  Nowhere  has  there  been  more  freedom  of 
opportunity,  more  spur  to  individual  ambition,  more  stirring  from 
education  and  from  the  consciousness  of  larger  possibilities.  Hence 
it  has  happened  that  in  those  parts  of  the  country  and  in  those 
social  strata  where  the  pressure  of  advancing  population  por- 
teticlecl  danger,  pressurehas  begun  to  relax.  ""^ 

"In  New  England,  for  example,  the  native-born  population  has 
long  been  multiplying  at  a  very  slow  rate.  The  gross  increase  in 
the  population  of  New  England  has  indeed  continued  to  be  con- 
siderable; but  the  increase  has  come  by  the  steady  inflow  of  immi- 
grants and  by  the  large  birth  rate  of  foreign-born  parents.  The 
striking  difference  between  the  fecundity  of  native  women  and  for- 
eign-born women  has  already  been  noticed  with  reference  to  Mich- 
igan. In  Massachusetts  it  is  even  more  striking;  the  birth  rate 
among  the  foreign  born  is  three  times  that  among  the  native  born, 
as  the  following  figures  show :  ^  — 

Annual  Bikth  Rates 


Native  parents  .     . 
Foreign-born  parents 


1883-1887 


17.1 

48.4 


1888-1892 


17.1 

49.6 


1893-1897 


17.0 

52.1 


These  figures  are  for  the  crude  birth  rate  (births  per  1000  of  popu- 
lation) and  exaggerate  the  difference  in  the  fecundity  of  the  two 
classes;  for  among  the  foreign  born  the  proportion  of  persons  in  the 
age  of  reproduction  is  greater.  But  even  comparing  the  births  in 
proportion  to  women  of  child-bearing  age,  the  rate  of  increase 
among  the  foreign  born  is  twice  that  among  the  native,  the  figures 
being:  — 

1  R.  R.  Kuczj'nski,  in  Quarterly  Journal  of  Economics,  Vol.  XVI,  pp.  143,  146, 
183.  Cp.  some  equally  striking  figures  given  by  A.  A.  Young  for  New  Hampshire 
in  Publications  American  Statistical  Association,  September  1905. 


248 


THE  DISTRIBUTION  OF  WEALTH 
Birth  Rates  fer  1000  Women  aged  14-49 


[54-§2 


1883-1887 

1888-1892 

1893-1897 

Native  mothers 

63.7 
124.5 

G2.8 
133.6 

62.6 

Foreign-born  mothers 

139.4 

The  careful  statistician  from  whom  these  figures  are  quoted 
concluded  (in  1901)  that  the  native-born  population  of  Massa- 
chusetts was  not  maintaining  itself;  if  the  birth  rate  which  prevailed 
during  1883-1897  were  to  continue  indefinitely,  this  population 
would  becQrftg_extinct.  Doubtless,  it  will  iiatjsQntMmeindefinitely4 
a  readjustment  to  conditions  of  stable  numbers,  probably  of  num- 
bers increasing  somewhat,  will  come;  but  a  low^birth  rate  will 
almost  surely  maintain  itself  permanently. 

In  the  native-born  farming  population  of  the  central  region  of 
the  country,  the  same  relaxation  of  the  rate  of  growth  is  showing 
itself,  tho  not  so  strikingly  as  in  New  England.  There,  too,  the 
average  number  of  children  per  marriage  tends  to  decline,  because 
parents  are  solicitous  not  only  to  maintain,  but  to  raisejtJja»-B©eiftl-« 
and  economic  .position  of  their  children. 

This  movement  is  steadily  extending,  and  is  gradually  affecting 
not  only  those  who  are  usually  thought  of  as  being  in  a  more  special 
sense  "  native  born,"  but  the  descendants  of  the  immigrants  as  well. 
/The  influence  of  free  institutions  and  of  free  opportunities  is  to  les- 
Isen,  possibly  to  destroy,  the  caste-like  character  of  social  classes. 
They  lift  the  second  generation  of  those  who  immigrate  into  the 
United  States  out  of  the  lowest  of  the  non-competing  groups.  In 
that  second  generation  the  birth  rate,  which  had  been  high  among 
the  first  arrivals,  begins  to  fall.  In  the  United  States  the  rate  of 
pay  for  common  laborers  and  unskilled  factory  workers  is  kept  low, 
not  by  a  continuing  high  birth  rate  within  the  country,  but  by  a 
high  birth  rate  and  low  standard  of  living  in  the  foreign  sources  of 
supply.  It  is  in  European  countries  that  the  millions  are  born 
who  steadily  replenish  the  lowest  stratum.  Once  they  are  settled 
here,  the  leaven  of  social  and  economic  ambition  slowly  but  surely 
affects  them.     It  makes  well-nigh  certain  a  relaxation  of  the  rate 


54-§3]  POPULATION  {Continued)  249 

of  growth  In  population.  As,  in  the  course  of  time,  natural  re- 
sources come  to  be  more  completely  preempted  and  the  possibility 
of  increase  is  subjected  to  the  conditions  of  an  older  country,  the 
Malthusian  difficulty,  there  can  be  little  doubt,  will  be  staved  off 
by  the  increasing  application  of  the  preventive  check. 

§  3.   The  question  which  now  faces  the  advanced  countries,  and 
especially  the  more  prosperous  classes  in  those  countries,  is  whether 
the  pEgyentjvexheck^^is  not  likely  to  be  carried  too  far.  The  popula- 
tion of  France  as  a  whole  barely  maintains  itself;  it  is  probable  that 
the  French  well-to-do  fail  to  maintain  themselves  at  all.     The  na- 
tive-born population  of  Massachusetts  probably  fails  to  maintain 
itself;  it  is  not  to  be  doubted  that  this  is  the  case  among  the  well-     . 
to-do  in  that  state.     The  main  cause  of  the  phenomenon  is  an     j 
excess  of  social  ambition  —  forethought  to  the  point  of  timidity.  J 
People's  nations  as  to  what  is  a  proper  mode  of  living  steadily  be-     I 
come  more  exacting,  and  the  expea^e^pf  maintaining..a.iaajily  on     | 
the  conventional  scale  becomes  greater.     Marriages  take  plajce  at    ■ 
a  comparatively  late  age,  and  the  proportion  of  those  who  do  not    / 
marry  at  all  is  considerable.  \Miere  there  is  accumulated  property, 
large  families  are  a\'£)ided  lest  the  inheritance  be  split  up  among 
too  many.     The  vejUMJBi^.seem  to  multiply  i6a^tu'api.dJy  of  all.      j 

This  tendency  brings  evils.  It  takes  away  part  of  the  stimulus  ^ 
which  comes  from  competition  and  pressure.  Children  who  are 
too  carefully  reared,  too  elaborately  educated,  tooffully  assured  of 
support  from  inherited  means,  la^gmuyy^e.  It  would  seem,  also, 
that  the  children  of  parents  who  have  led  a  nervously  exhausting 
life,  especially  if  the  parents  have  married  late,  lackvi^OT.  A 
population  which  marries  earlier  and, multiplies  more  rapi3ty,  and 
whose  newly  accruing  members  are  thrown  more  upon  their  own 
resources,  is  likely  to  be  more  progressive. 

Further,  the  more  prosperous  strata  among  the  population  are 
those  in  which  intellectual  gifts  are  most  likely  to  appear.  They 
are  prosperous  in  the  main  because  they  have  such  gifts.  No  doubt 
there  are  plenty  of  commonplace  persons  in  the  favored  classes 
among  whom  multiplication  is  so  markedly  restricted.  But  the 
able  and  the  intelligent  are  also  preponderantly  among  them. 


250  THE  DISTRIBUTION  OF  WEALTH  [  4-§  3 

Hence  in  this  tendency  among  the  well-to-do  there  is  a  danger  that 
the  quality  of  the  population  will  deteriorate.  Less  of  the  gifted 
are  born,  and  those  who  are  born  are  less  stimulated  by  active  com- 
petition to  exercise  their  gifts  to  the  utmost.  The  lower  strata  of 
the  population,  on  the  other  hand,  multiply  most  rapidly.  Tho 
some  individuals  of  high  qualities  emerge  from  among  them,  the 
great  mass  are  mediocre  and  perpetuate  mediocrity.  Those  few 
whose  unusual  abilities  enable  them  to  rise,  succumb  to  the  social 
ambitions  and  inhibitions  which  prevail  in  the  prosperous  class, 
and,  like  their  new  associates,  fail  to  propagate  freely. 

More  and  more  thought  has  been  given  of  late  years  to  the 
strange  contrast  between  our  care  in  breeding  animals  and  our 
carelessness  in  breeding  men.  The  human  race  could  be  immensely 
improved  in  quality,  and  its  capacity  for  happy  living  immensely 
increased,  if  those  of  poor  physical  and  mental  endowment  were 
prevented  from  multiplying.  But  it  is  very  uncertain  how  far  it 
will  prove  possible  to  select  for  propagation.  Tho  the  great  broad 
fact  of  heredity  is  unmistakable,  the  details  of  the  laws  of  inheri- 
tance are  but  dimly  known  to  us,  above  all  in  their  application  to 
man.  More  light  will  come  in  time  from  what  is  called  eugenics; 
that  is,  from  systematic  inquiry  as  to  the  transmittal  of  inborn 
and  acquired  traits  from  generation  to  generation,  with  a  view  to 
the  possibilities  of  selection  and  breeding.  In  the  present  state  of 
knowledge,  no  individual  differentiation  is  feasible;  least  of  all  do 
we  know  what  are  the  conditions  which  lead  to  the  birth  of  indi- 
viduals having  extraordinary  gifts.  And  even  if  more  accurate 
knowledge  comes  to  be  attained,  any  system  of  restriction  and  se- 
lection would  probably  be  inconsistent  with  that  striving  for  free- 
dom of  opportunity  and  for  individual  development  which  is  the 
essence  of  the  aspiration  for  progress.  It  is  difficult  to  conceive 
any  such  system  which  would  not  imply  the  sacrifice  of  present 
happiness  by  countless  individuals,  for  the  sake  of  a  cold  and  dis- 
tant ideal  of  ultimate  racial  improvement.  Only  some  very  lim- 
ited applications  of  the  principle,  in  extreme  cases,  seem  now  within 
the  bounds  of  possibility.  Certain  types  of  criminals  and  paupers 
breed  only  their  kind,  and  society  has  a  right  and  a  duty  to  protect 


54-§3]  POPULATION  {Continued)  251 

its  members  from  the  repeated  burden  of  maintaining  and  watch- 
ing such  parasites.  vSome  sorts  of  disease  and  taint  are  inherited, 
and  it  is  merciful  ahke  to  would-be  parents  and  possible  offspring 
to  put  a  check  on  their  transmission.  Beyond  this,  there  is  little 
prospect,  under  any  social  system  which  we  can  conceive,  that 
mankind  will  deliberately  select  a  portion  among  its  members  as 
alone  privileged  to  perpetuate  the  race. 

Too  much  stress  should  not  be  laid  on  what  is  called  "  race  sui- 
cide." The  extent  of  the  drift  toward  restraint  among  the  well- 
to-do  is  often  exaggerated.  Tho  prudence  might  possibly  be  car- 
ried to  the  point  of  impending  annihilation  among  the  higher 
strata,  it  will  probably  not  be.  Rapid  multiplication  and  large 
families  in  these  classes  are  indeed  not  likely.  But  a  maintenance 
of  their  numbers  and  a  moderate  increase  are  by  no  means  improb- 
able. Something  will  depend  on  the  ideals  which  influence  their 
lives.  rri'^iQlous,.iambition,  the  love  of  vulgar  display,  the  exag- 
geration of  artificial  distinctions,  all  tend  to  hesitation  in  marriage 
and  timorousness  in  begetting  offspring.  Higher  ideals  and  am- 
bitions tend  to  the  earlier  founding  of  families  and  to  less  limited 
fecundity. 

On  the  other  hand,  the  good  sides  of  restraint  on  multiplication  i 
should  not  be  forgotten.  For  mankind  as  a  whole,  declining  birth  / 
rates  and  lessening  pressure  on  population  mean  progress,  a^adfo, 
terioration.  The  prevalence  of  habits  of  prudence  among  all  strata 
means  a  gain  in  human  happiness.  Possibly  the  time  will  come 
when  this  sort  of  prudence  will  be  carried  so  far  that  population  in 
the  advanced  communities  will  no  longer  increase  at  all.  Then  a 
low  birth  rate  will  be  balanced  by  a  low  death  rate,  avoidable  suf- 
fering and  disease  will  be  reduced  to  the  minimum,||^  average 
duration  of  life  will  be  longer.  Progress  then  will  perhaps  be  less: 
or  at  least  it  will  be  in  a  different  direction,  with  differeTit  coiise- 
quences,  and  under  different  impulses.  There  is  no  reason  why  the 
arts  of  production  should  not  continue  to  advance,  and  certainly 
no  reason  why  the  intellectual  and  moral  life  should  not  move  up- 
ward. The  struggle  and  competition  of  rapidly  increasing  num- 
bers are  not  essential  for  happiness,  nor  is  an  approach  to  stationary 


252  THE  DISTRIBUTION  OF  WEALTH  [54-§3 

population  in  itself  a  cause  of  unhappiness.  In  a  stationary  state 
—  to  quote  the  eloquent  words  of  the  most  wide-minded  of  the 
earlier  economists,  John  Stuart  Mill  —  "  there  would  be  as  much 
scope  as  ever  for  all  kinds  of  mental  culture,  and  moral  and  social 
progress;  as  much  room  for  improving  the  Art  of  Living,  and  much 
more  likelihood  of  its  being  improved,  when  minds  ceased  to  be  en- 
grossed by  the  art  of  getting  on.  .  .  .  Only  when,  in  addition  to 
just  institutions,  the  increase  of  mankind  shall  be  under  the  delib- 
erate guidance  of  judicious  foresight,  can  .the  conquests  made  from 
the  powers  of  nature  by  the  intellect  and  energy  of  scientific  dis- 
coveries, be  made  the  common  property  of  the  species,  and  the 
means  of  improving  and  elevating  the  universal  lot."  ^ 

1  Political  Economy,  Book  IV,  Chapter  VI,  §  2. 


V«^. 


CHAPTER  55 
Inequality  and  its  Causes.    Inheritance 

Section  1.  The  fact  of  inequalit}^:  distribution  has  a  roughly  p5Tamidal  form. 
Figures  indicating  the  distribution  of  income  for  Prussia,  for  Great  Bri- 
tain, for  London,  253  —  Sec.  2.  The  distribution  of  property,  as  indicated 
by  probates  in  Great  Britain,  by  tax  statistics  in  Prussia,  257  —  Sec.  3. 
The  distribution  of  income  in  the  United  States,  258  —  Sec.  4.  Is  in- 
equality becoming  greater?  263  —  Sec.  5.  The  causes  of  inequahty: 
differences  in  inborn  gifts;  the  maintenance  of  acquired  advantages  thru 
opportunity  and  above  all  thru  inheritance,  265  —  Sec.  6.  Inheritance 
to  be  justified  as  essential  for  the  maintenance  of  capital  under  a  sj'stem 
of  private  property,  267  —  Sec.  7.  Possible  limitations  of  inheritance, 
thru  taxation  and  in  other  ways,  268  —  Sec.  8.  Proposals  for  the  radical 
restriction  of  inheritance,  269  —  Sec.  9.  The  grounds  on  which  private 
property  rests.  The  utilitarian  reasoning,  273  —  Sec.  10.  The  leisure 
class;  its  economic  and  moral  position,  275. 

§  1.  The  overshadowing  fact  in  the  distribution  of  property  and 
income  is  inequality.  How  great  is  the  inequahty,  and  what  are 
its  causes? 

On  this  subject  our  information  was  until  very  recent  times  sur- 
prisingly meagre.  It  is  still  far  from  complete  or  exact.  What  we 
have  is  based  mainly  on  income  tax  returns;  but  these  exist  for  a 
few  countries  only,  and  in  them  need  correction  and  explanation. 
Nevertheless,  familiar  observation,  supported  and  supplemented  by 
such  figures  as  we  have,  suffices  not  only  to  assure  us  of  the  fact  of 
inequality,  but  to  show  its  general  range  and  character.  We  know 
that  the  number  of  the  rich  is  very  small ;  that  the  number  of  per- 
sons who  are  well-to-do  and  comfortable,  tho  considerably  larger, 
is  still  small;  and  that  the  persons  with  slender  incomes  are  the 
most  numerous  of  all.  With  only  one  exception  of  importance, 
to  be  noted  presently,  distribution,  both  of  wealth  and  income,  has 
a  form  roughly  pyramidal.  To  put  the  analogy  more  carefully,  its 
form  is  like  an  inverted  peg  top  —  the  lowest  range  small,  then  a 

253 


254  THE  DISTRIBUTION  OF  WEALTH  [55-§  1 

very  large  extension,  and  thereafter  steady  shrinkage  as  the  high- 
est point  is  approached. 

It  will  suffice  to  give  a  few  typical  figures.  The  best  tax  statis- 
tics, of  a  kind  to  show  the  distribution  of  income  among  individuals 
of  a  large  country,  were  those  of  Prussia  in  the  days  before  the  war 
of  1914-1918.1  The  following  figures  are  for  the  year  1908;  almost 
any  other  year  of  that  period  would  show  the  same  results. 

Out  of  a  total  Prussian  population  of  38,000,000,  no  less  than 
18,000,000  (8,330,000  taxable  persons)  were  not  affected  by  the 
income  tax,  because  the  income  of  the  several  taxable  persons  was 
supposed  to  be  less  than  the  exempt  amount  —  900  marks.2  There 
were  taxable  and  assessed,  because  having  an  income  exceeding  the 
exempt  amount,  5,872,000  persons.  Among  these,  incomes  were 
distributed  as  follows  (in  round  numbers) :  — 

Taxable  Persons 

5,284,000,  or  90       per  cent,  had  incomes  of 

411,000,    "    7         "       "       " 

76,600,    "    1.3      "       "       " 

83,200,    "     1.4      "       «       « 

18,000,    "      .25    "       "       " 

3,800,    "       .05    "       "       " 

If  the  line  between  those  who  were  well-to-do  and  those  who  were 
not  be  drawn  at  3000  marks,  it  appears  that  approximately  no  more 
than  ten  per  cent  of  the  taxed  belonged  to  theVell-to-do  classes. 
The  figures,  be  it  observed,  take  account  only  of  the  persons  who 
came  within  the  income  tax  limits  and  in  fact  were  reached  by  the 
tax.  As  many  more,  roughly  speaking,  had  incomes  below  the 
exempt  amount.  Of  the  whole  number  of  families,  about  five 
per  cent  were  well-to-do.^ 

The  British  income  tax*  gives  materials  from  which  an  estimate 
can  be  made,  sufficiently  accurate  for  the  present  purpose,  of  the 
characteristics  of  the  distribution  of  incomes  in  Great  Britain. 
The  following  figures  are  for  1904:  — 

1  Compare  what  is  said  below,  in  Chapter  69,  of  income  tax  methods. 

2  In  considering  these  figures,  regard  must  of  course  be  had  t©  the  monetary  scale 
of  pre-v/ar  days. 

8  See  Schmoller's  estimates  (for  the  year  1899),  in  his  Grundriss  der  Volkswirth- 
schaftslehre,  Vol.  II,  pp.  139-140. 
*  See  below,  Chapter  69,  §  3. 


900  @ 

3,000  marks 

3,000  @ 

6,500      " 

6,500  @ 

9,500      " 

9,500  @ 

30,500     " 

30,500  @, 

100,000     « 

over 

.^00,000      " 

55-§l] 


INEQUALITY  AND  ITS  CAUSES 


255 


The  number  of  families  having  incomes  under     £160  was  6,775,000 

The  number  of  incomes  between       £160    "         £700    "       830,000 

"        "         "  "  £700    "       £2,000    "       122,000 

«  "        "         "  "  £2,000    "       £5,000    "       324,000 

"  "        "         "  "  £5,000    "     £50,000    "         14,200 

«  "        "         "        over        £50,000 350 

The  result  may  be  stated  in  another  way:  in  a  population  of 
43,000,000,  about  5,000,000  belong  to  families  having  an  income  of 
£160  a  year  or  more,  and  these  5,000,000  have  about  one  half  of  the 
total  income  of  the  British  people;  the  remaining  38,000,000,  with 
incomes  of  less  than  £160  per  family,  have  the  other  half  of  the  total 
income.  Such  figures  cannot  pretend  to  rigorous  accuracy.  Per- 
sons who  are  disposed  to  defend  and  justify  existing  inequalities 
usually  reach  estimates  showing  a  smaller  number  of  very  great 
incomes  and  a  larger  number  of  middle-class  incomes.  The  details 
of  the  calculations  are  of  interest  and  importance  for  statisticians, 
but  are  of  little  consequences  for  the  purpose  of  a  broad  survey. 
The  figures  cited  give  a  sufficiently  truthful  pictm-e  of  the  inequal- 
ity in  the  distribution  of  income  in  advanced  countries.^ 


Servant-keeping  class,  total  .  .  . 
Subdivided  thus: 

a.  SerA^ants"  kept,  1     ,  .  .  . 

6.          "             "      2     .  .  .  . 

c.  "             "      3     .  .  .  . 

d.  "            «      4     .  .  .  . 

e.  "  "  5  .  .  .  . 
/.  "  "  6  .  .  .  . 
g.  "  "  7  .  .  .  . 
h.          "             "      more  than  7 

Class  keeping  no  servants  .  .  .  . 


NuilBER 

Per  Cent  op 

OF  Persons 

THE  Population 

476,250 

11.0 

222,000 

5.51 

144,000 

3.4 

57,700 

1.3 

18,800 

0.4 

^11% 

13,300 

0.3 

7,100 

0.2 

3,000 

0.1 

4,350 

0.1 

3,372,000 

80.1 

1  The  figures  are  derived  from  those  submitted  (but  not  vouched  for  as  statis- 
tically accurate)  by  Mr.  A.  L.  Bowley ;  to  be  found  in  the  Report  of  the  Committee  on 
Income  Tax,  Pari.  Doc.  1906,  Vol.  IX,  p.  229.  My  grouping  of  the  figures  of  in- 
comes above  £160  is  somewhat  different  from  Mr.  Bowley's,  and  I  have  added  Mr. 
Chiozza  Money's  estimate  of  the  total  of  families  ha\-ing  an  income  of  less  than 
£160.  The  dividing  hne  is  put  at  this  point  (£160)  because  of  the  exemption 
of  incomes  below  it.  See  also  Mr.  Chiozza  Money's  Riches  and  Poverty  (1900), 
p.  41,  and  passim,  and  the  Parliamentary  Report  just  cited,  in  which  there  is  a  mass 
of  information. 

Useful  summaries  of  the  statistical  information  for  all  countries  have  been  con- 
tributed by  Dr.  Robert  Meyer  to  the  successive  editions  of  the  HandwQrterbuch  der 
Staatswissenschaften,  sub  verb.  "Einkommen." 


256 


THE  DISTRIBUTION  OF  WEALTH 


[55-§l 


An  entirely  different  basis  for  gaging  distribution  was  used  by- 
Mr.  Charles  Booth.     In  his  monumental  researches  on  London, 
not  being  able  to  secure  direct  information  about  incomes,  he  re- 
sorted to  the  test  —  obviously  a  significant  one  —  of  servant-keep- 
ing.    There  is  the  broad  line  of  demarcation  between  the  class 
without  servants  and  that  with  them;  and,  in  the  latter  class,  sub- 
/ division  according  to  the  number  of  servants.     It  appeared  that 
I  four  fifths  of  the  population  of  London  (80.1  per  cent),  or  3,  372,000 
persons  in  all,  belonged  to  the  non-servant-keeping  class.     The 
'  upper  or  servant-keeping  class  numbered  476,000  persons,  or  11 
'  per  cent  of  the  population  (the  remaining  9  per  cent  of  the  popu- 
lation included  the  servants  themselves,  and  inmates  of  hotels, 
lodging  houses,  and  institutions,  and  others  not  readily  brought 
within  the  scheme  of  classification) .     The  upper  class  proved  to 
be  divisible  into  sections,  according  to  the  number  of  servants  per 
household  (see  table  on  preceding  page).i 

On  the  basis  of  direct  observation,  Mr.  Booth  classified  the  popu- 
lation of  London  as  follows :  — 


Class  A  (lowest) 

"     B  (very  poor) 

"     C  and  D  (poor) 

"     E  and  F  (comfortable,  working) 

"     G  (lower  middle) 

«     H  (highest) 


Number  of 
Persons 


38,000 
317,000 
938,000 
2,166,000 
500,000 
250,000 


Per  Cent  op 
Population 


0.9 

7.5 

22.3 

51.5 

11.9 

5.9 


These  figures  serve  to  indicate  the  exception,  intimated  a  few 
moments  ago,  to  the  statement  that  distribution  has  a  completely 
pyramidal  shape.  It  is  pyramidal  only  until  the  very  lowest  tier 
is  reached.  In  that  tier,  numbers  are  not  larger  than  in  the  tier 
preceding.     Not  the  very  poor,  but  the  comparatively  comfort- 

1  Life  and  Labour  of  the  People  of  London,  Second  Series,  Vol.  I,  p.  5  seq.  (edition 
of  1903).  For  brevity  1  have  described  section  a  as  keeping  one  servant,  section  b 
as  keeping  two  servants,  and  so  on.  In  Mr.  Booth's  careful  analysis,  section  b  in- 
cludes some  small  families  with  but  one  servant,  as  well  as  large  families  with  two 
servants;  section  c  some  small  families  with  two  servants,  aa  well  as  larger  families 
with  three  servants;  and  so  on. 


55-§2]  INEQUALITY  AND  ITS  CAUSES  257 

able  working  class,  constitute  the  largest  single  element  in  the  popu- 
lation of  London.  Such  would  seem  also  to  be  the  case  in  Prussia, 
if  we  admit  that  the  income  tax  statistics  are  at  fault  in  ascribing  an 
income  of  less  than  900  marks  to  a  great  number  who  in  fact  have 
an  income  so  large.  Probably  the  same  result,  as  regards  the  lowest 
class,  would  be  reached  if  we  had  trustworthy  information  or  indi- 
cations on  the  distribution  of  incomes  in  any  of  the  advanced  coun- 
tries, such  as  Great  Britain,  France,  the  United  States. 

§  2.  The  situation  as  regards  the  distribution  of  ownership  of 
property  is  essentially  the  same.  One  or  two  sets  of  figures  will 
suffice  for  illustration.  The  British  inheritance  taxes  have  been 
carefully  administered  on  the  same  basis  for  many  years ;  not  thru- 
out  with  the  same  rates  of  taxation,  but  in  a  manner  to  show  for  a 
long  period  what  are  the  numbers  of  estates  of  varying  sizes.  Tak- 
ing the  ten  years  from  the  fiscal  year  1899-1900  thru  the  fiscal  year 
1908-1909,  we  find  that,  on  the  average,  there  were  probated  each 
year  estates  as  follows :  ^  — 

Small  estates,  not  exceeding     £500 48,000 

Estates  from  £500   to     £1,000 9,933 

1,000  "        10,000 16,484 

"  "  10,000  "        25,000 2,311 

25,000  "        50,000 911 

"  "  50,000  "        75,000 286 

75,000  "      100,000 140 

"  "         100,000  "      150,000 135 

"          "         150,000  "      250,000 88 

250,000  "      500,000 51 

"          "        500,000  "  1,000,000 18 

"       over  1,000,000        7  to  8 

For  Prussia  there  were  figures  of  a  similar  sort,  published  in  con- 
nection with  the  Erganzungssieuer,  a  tax  based  on  the  income  tax 
returns,  but  levied  with  respect  to  property,  not  income.  In  1908, 
there  were  in  round  numbers  1,500,000  persons  assessed  as  having 
property  of  6000  marks  or  more;  these  persons  and  their  families 
numbered  5,350,000  in  all.     Among  the  persons  assessed  :2  — 

1  I  have  calculated  these  averages,  for  all  except  the  smallest  estates,  from  the 
figures  given  for  the  several  years  in  the  Statistical  Abstract  for  the  United  Kirigdom. 
For  the  smallest  estates,  the  Statistical  Abstract  docs  not  give  the  full  total,  since  it 
takes  no  account  of  estates  less  than  £100  net.  The  figure  given  above  (the  first 
in  the  table)  is  in  round  numbers,  and  is  not  statistically  accurate;  but  it  is  accurate 
enough  for  the  purpose  in  hand. 

2 1  take  these  figures  from  the  Vergleichende  Uebersicht  submitted  to  the  Prussian 


258  THE  DISTRIBUTION  OF  WEALTH  [55-§  3 

marks 


731,700  persons 

had  property  from 

6,000  to       20,000 

262,300 

a 

11                i( 

20,000   "        32,000 

203,800 

(( 

U                     li 

32,000   "        52,000 

160,500 

u 

a                u 

52,000  "      100,000 

79,900 

U                     (( 

100,000  "      200,000 

43,360 

u               u 

200,000  "      500,000 

12,600 

u                u 

500,000  "  1,000,000 

5,300 

ti                « 

1,000,000  "  2,000,000 

3,000 

u 

"         over 

2,000,000  marks. 

The  results  are  in  both  countries  essentially  similar  to  those  for 
incomes.  The  number  of  millionaires  is  very  small  indeed ;  that  of 
the  rich  remains  still  small ;  the  numbers  become  larger  as  the  prop- 
erties become  less;  the  very  least  properties  are  the  most  numerous 
of  all.  Just  how  far  down  in  the  scale  the  same  tendency  would 
extend,  it  is  impossible  to  say;  but  it  is  certain  that  the  persons 
having  properties  below  the  limits  in  these  tables  greatly  exceed  in 
number  those  within  their  range.  In  Great  Britain,  only  one  out  of 
six  adults  left  at  death  as  much  as  £100  of  propertj^  and  only  one 
out  of  twenty  left  as  much  as  £1000.^  In  Prussia  about  one  out  of 
seven  in  the  population  had  6000  marks  or  more ;  six  sevenths  were 
not  affected  by  the  property  tax,  because  their  property  was  less 
than  6000  marks. 2  Those  who  possess  any  considerable  amount 
are  but  a  small  minority  of  the  population  in  any  of  the  countries 
of  advanced  civilization. 

§  3.  For  the  United  States  we  have  usable  figures  on  the  dis- 
tribution of  income,  tho  we  have  none  such  on  the  distribution  of 
ownership.  The  income  figures  are  based,  as  in  the  case  of  Euro- 
pean countries,  chiefly  on  tax  returns.  The  establishment  of  an 
income  tax  by  the  federal  government  in  1913  ^  led  to  the  publica- 
tion of  statistics  showing  the  size  and  number  of  the  several  incomes 
on  which  tax  was  levied.  For  the  first  five  years  during  which  the 
new  system  was  applied,  the  statistical  results  were  known  to  need 

Landtag  for  the  fiscal  year  1908-1909.     They  give  the  assessments  made  for  the 
triennial  period  1908-1910. 

1  Mr.  Chiozza  Money,  in  his  Riches  and  Poverty,  pp.  51,  72,  overstates  the  case, 
remarking  that  only  one  out  of  ten  in  the  population  leaves  any  property  at  death. 
As  Mr.  A.  L.  Bowley  has  pointed  otit  to  me,  the  significant  proportion  is  not  to  total 
population,  but  to  the  adult  population;  hence  the  proportion  stated  in  the  text  — 
one  o\it  of  six  adults. 

2  The  total  population  of  Prussia  in  1908  was  38,000,000;  the  families  of  the 
1,500,000  persons  assessed  for  property  tax  numbered  5,350,000  heads. 

3  See  below,  Chapter  69,  §  5. 


5^§3]  INEQUALITY  AND  ITS  CAUSES  259 

much  correction  if  they  were  to  be  used  as  indications  of  the  actual 
state  of  distribution.  As  in  all  cases  of  tax  levy  and  administra- 
tion, greater  success  was  attained  in  reaching  the  taxable  sources 
as  time  went  on.  In  1918,  when  the  country  was  in  the  throes  of 
the  GreatWar,  a  special  effort  was  made  by  the  authorities  to  secure 
full  statements,  and  the  spirit  of  public  service  roused  by  the  war 
led  to  more  ready  response  from  the  taxpayers  than  would  have 
been  got  in  ordinary  times.  Even  so,  the  returns  were  in  many 
respects  incomplete.  The  period  during  which  the  system  had 
been  administered  was  still  very  brief;  moreover,  the  ill- 
drafted  statutes  left  much  room  for  evasion,  partly  permitted 
by  the  law,  partly  unlawful.  The  figures  compiled  by  the 
Bureau  of  Internal  Revenue,  tho  less  untrustworthy  than  might 
have  been  feared,  called  for  much  revision  and  readjustment  before 
they  could  be  used  as  indications  of  the  actual  distribution  of  in- 
comes. But  they  were  carefully  analyzed  by  a  group  of  competent 
statisticians,  and  were  corrected  and  supplemented  by  the  use  of 
data  from  various  other  sources.  They  thus  served  as  the  basis  for 
a  conspectus  which  may  be  regarded  as  fairly  accurate. ^ 

The  number  of  individuals  having  incomes  of  given  sizes  in  1918 
was  judged  to  be  as  follows:  — 

Incomes  up  to  $2,000 32,078,411  persons 

"  from    2,000  to         3,000     .     «     .     .     .  3,065,024 

"                    3,000  "        10.000 1,970,991 

"                   10,000   "        50,000 233,181        " 

"                  50,000  "      200,000 18,956 

«                200,000  "      500,000 1,976 

"                500,000  "  1,000,000 369        « 

"             1,000,000  and  over 145        " 

Another  mode  of  showing  the  general  situation  is  to  state  the 
proportion  of  total  income  which  goes  to  the  well-to-do  on  the  one 
hand,  to  the  great  mass  of  the  community  on  the  other.  Individ- 
uals whose  incomes  v.ere  within  the  $2,000  class  (receiving  that 
amount  or  less)  constituted  86  per  cent  of  the  whole  number;  they 
received  60  per  cent  of  the  income.  Those  with  incomes  exceeding 
$2,000  constituted  14  per  cent  of  the  whole  number  and  received  40 

1  Income  in  the  United  States:  its  Amouiit  and  Distribution,  1909-1919.     By  the 
staff  of  the  National  Bureau  of  Economic  Research,  New  York,  1921. 


/ 
V  J 


260 


THE  DISTRIBUTION  OF  WEALTH 


[55-§3 


per  cent  of  the  income.  Putting  the  dividing  hne  between  the  well- 
to-do  and  the  others  at  $3,000,  it  appeared  that  those  having  in- 
comes within  that  figure  constituted  94  per  cent  of  the  whole,  and 
received  73  per  cent  of  the  income ;  while  those,  with  incomes  of  more 
than  §3,000  were  6  per  cent  of  the  number  and  received  27  per  cent 
of  the  income.  Stated  in  a  slightly  different  way,  the  topmost  5 
per  cent  of  income  receivers,  the  most  prosperous  tier  of  society,  re- 
ceived 26  per  cent  of  the  total  income;  the  absolute  amounts  being 
60.5  billions  of  dollars  of  total  income,  of  which  this  fortunate  tier 
received  16  billions. 

A  more  detailed  representation  is  given  by  the  appended  dia- 
gram.    On  that  the  width  of  the  several  parallelograms  shows  the 

number  of  persons  re- 
ceiving the  incomes 
indicated  on  the  mar- 
gin. Each  upward 
step  marks  a  change 
of  SlOO  in  income. 
The  figure,  it  will  be 
seen,  conforms  closely 
to  the  inverted  peg- 
top  tyipe.  The  very 
widest  parallelogram, 
indicating  in  what 
single  stratum  are  the 
largest  number  of  in- 
come receivers,  is  not 
the  lowest  of  all;  it  is 
that  for  incomes  be- 
tween S900  and  SIOOO. 
Above  and  below  this 
are  the  fixed  strata 
with  incomes  from 
8800  to  §1200  inclu- 
sive), all  wide,  all  indicating  large  numbers.  The  strata  narrow  as 
greater  incomes  are  reached,  and  the  number  of  persons  having 


2000 


^.u^•a::.9  of  pdkons  ■ 


55-§3]  INEQUALITY  AND  ITS  CAUSES  261 

incomes  as  great  as  $4000  already  becomes  slender.  The  figure 
,has  not  been  extended  beyond  this  range,  because  almost  at  once 
it  would  become  a  thin  line.  That  line,  if  plotted  on  the  same 
scale,  so  as  to  indicate  all  incomes  up  to  the  very  highest,  would 
be  thousands  of  feet  long.  The  point  of  the  peg-top  would  be 
immensely  elongated  and  extremely  attenuated. 

In  drawing  inferences  from  such  data  as  these^  account  must  al- 
ways be  taken  of  monetary  standards  and  of  the  ranges  of  prices  and 
money  incomes.  Some  qualifications  are  obvious.  Others  are  less  so; 
they  call  for  the  critical  application  of  general  economic  principles. 

An  obvious  correction  relates  to  the  extraordinary  change  in 
monetary  conditions  which  took  place  between  the  early  years  of 
the  century,  to  which  the  figures  for  Great  Britain  and  Prussia 
refer,  and  the  year  1918,  for  which  we  have  the  American  figures. ^ 
An  American  income  of  $3,000  in  1918  meant  no  more  than  one  of 
$1,500  in  1913.  Almost  equally  obvious,  in  comparison  between 
countries,  is  the  need  of  allowing  for  international  differences. 
Roughly  speaking,  a  British  income  of  £160  (about  S800)  signified, 
say  in  1913,  the  same  social  standing,  tho  probably  not  so  much 
general  purchasing  power,  as  an  American  income  of  $1,500  for 
that  year,  or  of  $3,000' for  1918.  In  interpreting  the  British 
figures  for  1913,  the  sum  of  £160  may  be  taken  as  the  dividing 
line  between  the  well-to-do  and  the  great  mass  of  the  population. 
The  much  larger  sum  of  $3,000  may  be  taken  as  the  correspond- 
ing line  for  the  United  States  in  1918.2  As  is  indicated  by  the 
statistics  already  given,  and  as  will  appear  more  fully  from  others 
presently  to  be  cited,  the  proportion  of  income  going  to  the  well-to- 
do  is  larger  in  Great  Britain  than  in  the  United  States. 

Another  correction  is  of  a  more  troublesome  sort.  It  bears  on 
the  interpretation  of  the  money  income  and  the  social  position  of  a 
class  which  is  large  in  the  United  States  and  has  no  counterpart  in 
Great  Britain  —  the  independent  farmer.  The  millions  of  Amer- 
ican farmers  have  incomes  which  usually  are  much  below  the  well- 

1  Compare  what  is  said  on  this  topic  in  Chapter  23,  §  6. 

2  Similarly  3,000  marks  in  Prussia  for  1908  correspond  roughly  in  social  signifi- 
cance to  S3,000  in  the  United  States  for  1918. 


262  THE  DISTRIBUTION  OF  WEALTH  [55-§3 

to-do  line,  and  indeed  seem  to  be  below  the  average  of  working-class 
incomes.  I  say  seems  to  be ;  for  the  method  of  calculating  the  farm- 
er's income  requires  explanation  and  raises  questions.  The  price 
of  the  farm  produce  consumed  by  him  and  his  family  is  reckoned  as 
part  of  his  income,  and  constitutes  a  considerable  item.  The  only 
way  to  measure  its  amount  is  to  ask  what  price  would  this  produce 
yield  if  sold  by  the  farmer  and  not  consumed  by  him?  If  his 
farm  supply  of  butter,  eggs,  fruit,  vegetables,  poultry  and  meat 
(not  to  mention  the  rental  of  his  dwelling)  would  have  sold  for  $300, 
his  direct  money  receipts  should  be  supplemented  by  $300  in  order 
to  show  his  effective  money  income.  But  —  and  here  comes 
the  troublesome  point  —  this  extra  $300  means  much  more 
in  commodities,  in  "real"  income,  than  the  same  sum  means 
for  the  workingman  dweUing  in  a  city.  What  the  farmer 
could  have  sold  at  his  farm  for  $300  would  have  cost  the  urban 
dweller  much  more  —  doubtless  twice  as  much  on  the  average. 
The  spread  between  the  price  got  by  the  producer  (using  that  term 
in  the  everyday  sense)  and  that  paid  by  the  consumer  is  a  standing 
source  of  wonder  to  economists;  it  is  perhaps  largest  for  farm 
products  of  the  kind  here  under  consideration.  When  judging  of 
the  farmer's  income,  then,  we  must  apply  a  factor  of  correction 
similar  to  that  needed  in  international  comparisons.  Tho  the 
money  income  of  an  American  mechanic  be  twice  as  high  as  that  of 
an  English  one,  and  thrice  as  high  as  a  Frenchman's,  his  real  income 
is  by  no  means  higher  in  the  same  degree.  Similarly,  tho  the  Amer- 
ican mechanic's  income  be  fifty  per  cent  larger  than  that  of  the 
American  farmer,  the  real  income  of  the  two  may  be  substantially 
equal.  These  are  matters  to  which  little  regard  is  paid  in  popular 
discussion,  least  of  all  as  regards  comparisons  within  a  country. 
They  illustrate  the  need  of  discrimination  in  the  use  of  statistics, 
especially  of  statistics  which  purport  to  give  the  total  of  a  people's 
income  and  the  division  of  that  total  among  different  strata.^ 

1  Applying  this  correction  to  the  peg-top  figure  on  p.  260,  we  should  have  to 
conceive  tax  income  strata  below  (say)  $800  to  be  much  narrower  than  there  shown, 
and  those  above  $800  and  up  to  (say)  $1500  much  wider.  By  so  changing  the  figure 
we  should  represent  with  much  closer  approach  to  accuracy  the  distribution  of 
"real"  or  commodity  income. 


55-§4]  INEQUALITY  AND  ITS  CAUSES  263 

§  4.  Another  question  is  whether  inequality  is  becoming  greater 
or  less ;  whether  it  is  true,  as  often  alleged,  that  the  rich  are  becom- 
ing richer  and  the  poor  poorer.  Here  again  we  have  not  much  pre- 
cise information.  But  the  general  trend  of  such  data  as  we  possess 
indicates  that  while  the  rich  are  probably  growing  richer  and  cer- 
tainly not  less  rich,  the  poor  are  not  becoming  poorer. 

A  careful  comparison  made  for  G^eat  Britain  for  the  years  1880 
and  1913,  showed  that  during  the  interval  (about  a  generation) 
the  average  incomes  of  the  wages-receiving  classes  had  risen  45 
per  cent,  those  of  the  well-to-do  classes  (having  incomes  above  the 
sum  exempt  from  income  tax)  30  per  cent.  Of  the  total  income  of 
the  British  people,  almost  exactly  the  same  share  (not  quite  one 
half)  went  to  the  well-to-do  in  1913  as  in  1880.  That  fraction,  be 
it  observed,  is  larger  than  the  corresponding  one  for  the  United 
States.  There,  as  appears  from  the  figures  just  given,  the  propor- 
tion of  total  income  going  to  the  distinctly  well-to-do  is  about 
one  quarter  of  the  total.  This  marked  difference  between  the  two 
countries  is  mainly  due  to  the  great  size  and  the  general  prosperity 
of  the  independent  farming  class  in  the  United  States.  In  Great 
Britain  —  to  retiu-n  to  the  trend  of  change  as  it  appears  in  that 
country  —  the  absolute  number  of  the  prosperous  had  nearly 
doubled,  while  the  number  in  the  wages-receiving  class  had  risen 
by  less  than  a  quarter.  The  most  noticeable  change  in  the  appor- 
tionment of  the  population  between  the  several  strata  was  in  the  in- 
creasing share  going  to  a  class  intermediate  between  the  prosper- 
ous and  the  receivers  of  wages  —  to  persons  with  small  salaries, 
shopkeepers,  and  the  like,  having  incomes  below  the  exempt 
amount  but  above  the  usual  range  for  artisans  and  laborers.  A 
larger  proportion  of  the  population  had  been  able  to  achieve  an 
ascent  to  the  levels  of  the  intermediate  and  the  prosperous  classes. 
Those  who  remained  poor,  on  the  other  hand,  had  yet  become  some- 
what less  poor.i 

A  similar  trend  appeared  in  Germany  about  the  same  period. 
Here  again  the  tax  statistics  are  sources  of  fairly  precise  informa- 

1  See  the  analysis  by  A.  L.  Bowley,  an  admirable  example  of  statistical  technique. 
The  Change  in  the  Distribution  of  the  National  Incomes,  1880-191S  (1920). 


264  THE  DISTRIBUTION  OF  WEALTH  [55- §  4 

tion.  They  indicate  that  in  Germany  too  the  incomes  of  the  poor 
were  rising.  There  was,  further,  a  steady  movement  upwards,  a 
certain  proportion  of  persons  constantly  swinging  themselves  into 
a  more  prosperous  tier.  The  comfortable  working  class  and  the 
lower  middle  class  became  not  weaker,  but  stronger.  There  was  no 
tendency  toward  the  disappearance  of  the  middle  class,  nor  any 
tendency  toward  the  complete  absorption  of  the  high  incomes  by  a 
decreasing  number  of  very  rich  persons.  Germany  during  that 
period  was  advancing  faster  than  Great  Britain,  being  in  a  stage 
which  her  rival  had  come  thru  half  a  century  before.  It  is  to  be 
expected  that  a  rapid  burst  of  material  progress  shall  be  accom- 
panied, while  it  is  going  on,  by  special  gains  on  the  part  of  the  busi- 
ness class  and  so  of  the  well-to-do  in  general.  Hence  we  find  in 
Germany  indications  of  an  increasing  concentration  of  income  and 
property  in  the  hands  of  the  very  prosperous  classes,  yet  with  a 
growth  of  the  numbers  within  that  class,  and  not  at  the  expense  of 
a  deterioration  in  the  condition  of  the  less  prosperous. 

For  the  United  States  we  are  less  informed  about  the  trend  of 
inequality  —  whether  becoming  more  or  less  —  than  about  the  ex- 
isting situation.  But  it  is  altogether  probable  that  during  the  gen- 
eration preceding  the  European  war  the  course  of  development  was 
in  general  like  that  of  Germany;  for  both  countries  were  in  a  similar 
stage  of  rapid  industrial  growth.  The  accumulation  of  conspicu- 
ous great  fortunes  led  to  a  belief  in  many  quarters  that  inequality 
was  becoming  much  more  accentuated.  But  the  country  is  vast 
and  its  population  enormous;  the  persons  of  the  middle  class, 
whether  in  its  lower  or  upper  range,  tho  not  so  conspicuous  as  the 
rich,  are  very  many.  It  is  possible  that  the  numbers  and  the  in- 
comes of  the  millionaires  increased  faster  than  the  numbers  and 
incomes  of  those  simply  rich  or  well-to-do;  for  the  topmost  class 
was  swelled  not  only  by  the  working  of  the  modern  tendency  to 
large-scale  industry,  but  also  by  the  peculiar  conditions  of  Amer- 
ican corporations,  by  the  wider  range  of  privately  managed  indus- 
tries, by  the  extraordinary  pace  of  material  progress.  It  is  prob- 
able also  that  the  pressure  on  the  very  lowest  class  from  inflowing 
immigrants  prevented  participation  by  that  stratum  in  the  general 


55-§5]  INEQUALITY  AND  ITS  CAUSES  265 

advance  to  the  same  extent  as  in  other  countries.     Whatever  be 
one's  surmise  on  the  effects  of  the  special  factors  that  appeared  in 
the  United  States,  it  is  improbable  that  the  main  lines  of  change   \ 
were  different  from  those  of  countries  having  like  industrial  charac-    ' 
teristics.i 

§  5.  Such  are  the  broad  facts  as  to  inequality.  How  are  they  to 
be  explained?  and  how,  if  at  all,  to  be  justified? 

The  causes  of  inequality  are  reducible  to  two  —  first,  inborn  dif^; 

ferences  in  gifts;  and  second,  the  maintenance  of  acquired  advan- 
tages thru  environment  and  thru  the  inheritance  of  property.  The 
origin  of  inequality  is  to  be  found  in  the  unequal  endowments  of 
men;  its  perpetuation  in  the  influence  of  the  inheritance  both  of 
property  and  of  opportunity,  and  also  in  the  continued  influence 
of  native  ability  transmitted  from  ancestor  to  descendant. 

No  doubt  at  the  outset  all  differences  arose  from  the  inborn 
superiority  of  some  men  over  others.  The  savage  chief  excels  his 
fellows  in  strength  and  in  cunning.  Thruout  history  the  strong 
and  able  have  come  to  the  fore.  They  continue  to  do  so  in  the 
peaceful  rivalries  of  civilized  communities.  In  our  present  society, 
the  differences  in  wages  —  that  is,  in  the  incomes  from  all  sorts  of 
labor  —  are  the  results,  in  large  degree  at  least,  of  differences  in 
endowments.  The  striking  case  in  modern  times  is  that  of  the  busi- 
ness man.  Especially  in  the  upper  tier,  high  native  ability  explains  f 
the  exceptional  earnings  of  the  fortunate  few  among  the  business 
class.  In  other  occupations,  tho  training  and  environment  count 
for  much,  inborn  gifts  are  still  of  dominant  importance  in  explain- 
ing the  largest  incomes  from  labor. 

But  at  a  very  early  stage  in  the  development  of  society,  this  orig- 
inal cause  of  difference  is  modified,  often  thrust  aside,  by  the  per- 

1  On  the  tendencies  in  distribution  shown  by  German  figures,  see  the  well-known 
paper  by  Professor  Adolf  Wagner  in  the  Zeitsc.hrift  d.  Preuss.  Statist.  Bureau,  1904, 
p.  92,  and  passim.  His  conclusions  are  confirmed  by  Robert  Meyer,  in  the  Hand- 
wdrterbiich  der  Staatswissenschaften,  Vol.  Ill,  p.  688  (third  edition,  1909).  Cp.  Som- 
bart,  Dcut'ichc  Volkswirtschaft  im  19.  Jahrhundert,  p.  506. 

The  well-known  proposal  of  Professor  Pareto  to  state  the  general  tendency  in 
mathematical  terms  is  in  his  Cours  d'^Jconomie  Politique,  Vol.  II,  Book  III,  Chap- 
ter I,  where  are  also  figures  from  various  sources.  It  is  subjected  to  searching  criti- 
cism in  A.  C.  Pigou,  The  Economics  of  Welfare,  Part  V,  Chapter  II. 


266  THE  DISTRIBUTION  OF  WEALTH  [55-§5 

petuation  of  established  advantages.  In  the  feudal  system,  and 
in  any  society  organized  on  a  basis  of  caste,  inequality  is  main- 
tained by  force  of  rigid  law.  In  the  supposedly  free  and  competi- 
tive society  of  modern  times,  advantage  still  tends  to  maintain 
itself.  It  does  so  in  two  ways  —  thru  the  influence  of  environment 
and  opportunity,  and  thru  the  inheritance  of  property. 

Environment  and  opportunity  have  already  been  considered.^ 
Tho  it  is  not  certain  to  what  degree  social  stratification  rests  on 
factitious  advantages,  to  what  degree  on  the  inborn  moral  and  in- 
tellectual qualities  of  the  several  classes,  it  is  clear  that  the  artificial 
causes  play  a  great  part.  A  multitude  of  forces  tend  to  keep  a  per- 
son in  the  social  grade  of  his  parents.  Only  those  of  exceptional 
gifts  rise  easily  above  it,  and  only  those  of  exceptional  defects  fall 
below  it. 

More  important,  how^ever,  is  the  direct  inheritance  of  property. 
Its  influence  is  enormous.  Obviously,  this  alone  explains  the  per- 
petuation of  the  incomes  derived  from  capital, land,  income-yielding 
property  of  all  sorts,  and  so  explains  the  great  continuing  gulf  be- 
tween the  haves  and  the  have-nots.  It  serves  also  to  strengthen 
all  the  lines  of  social  stratification,  and  to  reenforce  the  influences 
of  custom  and  habit.  Persons  who  inherit  property  inherit  also  op- 
portunity. They  have  a  better  start,  a  more  stimulating  environ- 
ment, a  higher  ambition.  They  are  likely  to  secm'e  higher  incomes, 
and  to  preserve  a  higher  standard  of  living  by  late  marriages  and 
few  offspring.  The  institution  of  inheritance  promotes  social 
stratification  thru  its  indirect  effects  not  less  than  thru  its  direct. 

Nothing  illustrates  so  fully  the  combined  influence  of  inborn  gifts, 
of  property  inheritance,  and  of  perpetuated  environment,  as  the 
position  of  the  person  dominant  in  modern  society  —  the  money- 
making  business  man.  In  the  first  stages  of  any  individual  busi- 
ness man's  career,  the  possession  of  means  counts  for  much.  After 
the  initial  stage,  native  ability  tells  more  and  more.  By  whatever 
ways  he  gets  his  start,  the  leader  of  industry  prospers  and  accumu- 
lates; and,  as  he  accumulates,  is  again  favored  more  and  more  by 
large  possessions.     When  he  dies,  he  leaves  a  trail  of  descendants, 

1  Chapter  47. 


55- §6]  INEQUALITY  AND  ITS  CAUSES  267 

who  perhaps  inherit  abiHty  and  almost  certainly  inherit  property. 
With  property  they  inherit  a  new  environment  and  new  opportuni- 
ties. It  may  indeed  happen  that  the  property  will  be  dissipated 
thru  lack  of  thrift  or  judgment,  or  subdivided  among  heirs  into 
minute  portions.  But  neither  of  these  results  is  probable;  and  even 
if  they  occur,  the  descendants  have  ambitions  and  surroundings 
very  different  from  those  of  the  poorer  class  from  which  the  ances- 
tor may  have  sprung.  In  every  way  inequalities,  even  tho  they 
arise  at  the  outset  without  favor,  tend  to  be  perpetuated  by  inheri- 
tance and  environment. 

§  6.  What  can  be  said  in  justification  of  the  inheritance ^f  prop- 
erty^ which  acts  so  powerfully  to  maintain  inequality?' 

Inheritance  arose  historically  from  the  sense  of  the  unity  of  the 
family.  The  ancestor  in  early  times  was  not  so  much  the  im- 
mediate owner  of  the  property  as  the  head  and  representative  of  the 
family  which  owned  the  property.  Its  devolution  to  the  surviving 
members  was  no  change  of  ownership,  but  a  transfer  to  new  repre- 
sentatives of  the  continuing  owners.  But  this  explanation  of  in- 
heritance, tho  historically  sufficient,  serves  little  to  explain  the  in- 
stitution as  it  stands  now,  still  less  to  justify  it.  The  ground  on 
which  inheritance  is  now  to  be  defended  is  frankly  utilitarian.  In 
a  society  organized  on  the  basis  of  private  property,  inheritance  is 
essential  to  the  maintenance  of  capital. 

It  may  be  open  to  question  how  far  inheritance  is  necessary  for 
the  first  steps  in  accumulation.  The  motives  that  lead  to  money- 
making  and  to  the  initial  stages  of  saving  and  investment  are  va- 
rious: not  only  the  safeguarding  of  the  future  for  one's  self  and 
one's  dependents,  but  social  ambition,  the  love  of  distinction,  the 
impulses  to  activity  and  to  domination.  For  sustained  accumula- 
tion and  permanent  investment,  however,  the  main  motives  are 
domestic  affection  and  family  ambition.  The  bequest  of  a  compe- 
tence or  a  fortune,  tho  often  a  dubious  boon  for  the  descendants,  is 
a  mainspring  for  its  upbuilding  by  the  ancestor.  If  we  were  to 
put  an  end  to  inheritance,  decreeing  that  all  estates  should  escheat 
to  the  public  at  death,  the  owner  would  commonly  dissipate  his 
property.   One  of  the  motives  for  its  first  acquisition  would  be  gone, 


268  THE  DISTRIBUTION  OF  WEALTH  [55-§7 

and  certainly  the  chief  motive  for  its  maintenance.  Why  accumu- 
late and  invest  for  the  benefit  of  the  community  at  large? 

This  is  the  ground  for  maintaining  that  the  taxation  of  inheritance 
should  be  kept  within  limits.  As  will  appear  later,  the  transfer  of 
property  at  death  gives  a  convenient  occasion  for  the  levy  of  taxes 
and  for  the  application  of  progressive  rates.i  But  such  taxes  tend 
to  trench  on  capital.  Unless  kept  within  moderate  limits,  they  are 
paid  out  of  the  principal  of  the  estate,  not  out  of  income;  and  this 
lessening  of  the  individual's  "capital"  presumably  leads  to  a  corre- 
sponding lessening  of  social  capital.  More  than  this:  the  higher 
they  become  and  the  nearer  they  approach  to  confiscation,  the 
more  probable  it  is  that  the  original  accumulation  of  capital  will 
be  checked. 

§  7.  It  does  not  follow  that  inheritance  should  be  unre- 
stricted. Some  limitations  can  certainly  be  imposed  which  do 
not  affect  the  essential  efficacy  of  the  institution.  Others,  tho 
they  may  lead  to  a  curtailment  of  capital,  may  bring  countervail- 
ing advantages.  By  lessening  inequality,  they  may  bring  social 
gains  outweighing  the  material  loss. 

There  is  no  reason  why  intestate  succession  should  proceed  in- 
definitely to  the  most  distant  kin.  Where  a  man  does  not  trouble 
himself  to  make  a  will,  it  may  fairly  be  presumed  that  his  property 
was  not  got  together  with  an  eye  to  distant  heirs.  Neither  his  ac- 
cumulation nor  that  by  others  will  be  checked  if  the  public  appro- 
priates a  great  slice,  even  the  whole,  of  such  windfalls.  On  similar 
grounds  it  is  justifiable  to  make  succession  taxes  heavier  as  the 
degree  of  relationship  to  the  decedent,  whether  testate  or  intestate, 
becomes  more  and  more  remote. 

A  different  proposal,  and  one  having  a  different  object,  was  made 
long  ago  by  John  Stuart  Mill:  that  the  amount  transmissible  to 
any  single  heir  or  devisee  be  limited.  Let  a  maximum  be  fixed 
which  a  person  can  acquire  by  devise  or  inheritance  or  by  donation 
inter  vims.  The  sum  might  be  fixed  at  a  million  dollars  or  much 
less  or  something  more;  the  precise  amount  would  depend  on  the 

1  Sco  Chapter  69,  §  6,  and  in  general  what  is  said  in  Chapters  68  and  69  on  Pro- 
gressive Taxation. 


55-§8]  INEQUALITY  AND  ITS  CAUSES  269 

degree  to  which  the  ruling  public  opinion  had  become  impatient  of 
persisting  inequality.  Subject  to  this  important  limitation,  the 
successful  money-maker  would  be  free  to  dispose  of  his  property. 
He  might  divide  it  among  many  recipients  or  erect  a  monument  for 
himself  by  large  gifts  for  public  purposes.  Left  in  command  over 
his  fortune  to  this  extent,  he  might  refrain  —  so  the  proponents 
expect  —  from  dissipating  it  during  life.  The  accumulation  of 
capital  would  not  then  be  checked.  But  the  devolution  of  very 
great  fortunes  and  the  perpetuation  of  an  upper  crust  of  plutocrats 
would  be  prevented.  The  greatest  and  most  glaring  of  inequalities 
would  come  to  an  end. 

The  ground  here  is  uncertain.  It  is  true  that  the  money-gather- 
ing motives,  strong  in  themselves,  would  still  be  stimulated  by  the 
liberty  to  dispose  of  unlimited  means  in  some  way  or  other.  Yet 
the  restriction  of  the  amount  transmissible  to  immediate  descend- 
ants might  often  operate  to  promote  reckless  expenditure  during 
the  owner's  lifetime.  We  should  have  to  fall  back  on  the  reflection 
that  extreme  inequality  of  permanent  possessions  is  not  only  an  ill 
in  itself,  inimical  as  it  is  to  the  largest  possibilities  of  well-being,  but 
is  dangerous  as  a  rule  for  the  supposedly  fortunate  beneficiaries. 
And  there  is  the  further  consideration  that  what  might  be  lost  to 
capital  thru  this  reckless  expenditure  might  readily  be  made  up 
from  the  growth  of  accumulation  elsewhere.  It  has  been  re- 
marked 1  that  the  forces  that  make  for  accumulation  and  savings 
proceed  apace  in  modern  societies  and  seem  likely  to  provide 
in  abundant  and  even  superabundant  measure  the  wherewithal  for 
the  upbuilding  of  their  material  outfit.  Tho  a  few  great  properties 
might  be  curtailed  of  their  conceivable  maxima,  the  great  bulk  of 
savings  would  go  on  as  before,  and  in  the  aggregate  probably  would 
provide  enough.  The  loss  would  not  be  greater  than  society  could 
afford. 

§  8.    More  radical  in  character,  and  calling  for  quite  diflFerent 

measures  in  their  execution,  are  proposals  looking  to  the  complete  , 

appropriation  of  devised  property  by  the  public  after  the  lapse  of 

a  cotipTe  of  generations.     A  novel  and  ingenious  scheme  is  that  of 
\ 

1  See  Chapter  39,  §  6. 


270  THE  DISTRIBUTION  OF  WEALTH  [55- §  8 

an  Italian  writer. ^  Successive  stages  of  levy  are  suggested,  to  ap- 
ply to  everything  above  a  decent  or  reasonable  exempt  minimum. 
Let  one  third  of  the  property  {i.e.  of  the  excess  over  the  minimum, 
the  "taxable"  amount)  be  taken  by  the  state  on  the  first  devolu- 
tion; another  third  on  the  second  devolution;  the  remainder  on  the 
third  and  last.  The  owner  (testator)  might  dispose  of  as  great  an 
aggregate  as  he  pleased,  and  to  as  few  or  as  many  as  he  pleased. 
After  the  first  devolution,  and  presumably  during  the  first  genera- 
tion, most  of  the  property  would  still  remain  in  the  hands  of  the 
beneficiaries.  A  smaller  part  would  remain  to  them  in  the  second 
stage,  and  finally  in  the  third  (or  fourth  or  fifth,  according  to  the 
stages  selected)  everything  would  go  to  the  public.  The  assump- 
tion is  that  the  testator  is  more  concerned  about  his  children  than 
about  his  grandchildren,  and  progressively  less  concerned  about 
remoter  descendants.  So  long  as  most  of  his  property  can  go  to 
those  whose  prosperity  he  has  at  heart,  he  will  keep  it  intact.  Ab- 
rogation of  the  privileges  of  distant  descendants  will  not  influence 
him. 

It  is  a  variant  of  the  same  line  of  thought,  involving  the  same 
questions  of  principle,  when  it  is  suggested  that  nothing  but  a  series 
of  life-interests  be  allowed  to  pass  by  inheritance.  Let  the  testator 
dispose  of  the  income  of  his  property  as  he  pleases  for  two,  three, 
four  lives  —  as  many  as  really  signify  to  him.  Thereafter  the 
public  is  to  take  everything. 

Of  all  such  schemes  it  is  to  be  remarked  that  they  necessarily  lead 
at  an  early  stage  in  their  operation  to  control  and  even  management 
of  the  property  by  a  public  authority.  They  might  succeed  in 
keeping  in  operation  the  forces  that  bring  alDOut  the  upbuilding  of 
large  properties  by  the  original  money-makers.  But  evidently 
there  is  nothing  in  them  to  induce  the  successive  beneficiaries  to 
maintain  the  properties  intact.  The  several  inheritors,  and  espe- 
cially the  last  in  the  series,  would  be  tempted  to  dissipate  what 
was  left  in  their  hands.     The  state  must  keep  control  over  the 

1  E.  Rignano,  Un  socialisme  en  harmonie  avec  la  doctrine  iconomique  libirale 
(1909).  The  French  version  is  the  only  one  I  have  seen.  The  proposal  is  explained 
and  considered  by  H.  Dalton,  The  Inequality  of  Incomes,  Chapter  IX. 


55-§8]  INEQUALITY  AND  ITS  CAUSES  271 

principal,  in  order  to  make  sure  that  it  remains  unimpaired.  Un- 
less this  were  done,  the  probabilities  are  overwhelming  that  the 
capital  sums  in  the  hands  of  the  individuals  and  the  corresponding 
material  outfit  of  the  community  would  waste  away. 

It  is  not  at  all  unthinkable  that  the  state  should  see  to  it  that 
there  is  no  such  wastage.  A  public  office  might  be  created,  charged 
with  the  administration  of  the  subject  estates.  It  could  pay  to 
the  several  beneficiaries  annual  incomes  according  to  their  ordained 
shares.  It  would  gradually  become  the  owner  of  a  greater  and 
greater  mass  of  property,  which  could  be  put  thru  loans  at  the  dis- 
posal of  the  managers  of  industry.  Private  management  might 
conceivably  persist  under  such  an  arrangement.  And  the  accumula- 
tion of  large  properties,  even  of  fortunes,  might  still  go  on.  But  the 
wealthy  leisure  class  would  not  be  perpetuated  thru  the  centuries. 

A  proper  public  office  —  this  is  the  essential.  There  would  have 
to  be  a  vast  and  elaborate  organization,  a  staff  of  able,  high-minded, 
permanent  officials,  complete  separation  from  the  ordinary  financial 
operations  of  the  government.  And  here  we  face  the  difficulty 
which  confronts  us  in  every  proposal  for  social  betterment.  Is  the 
public  equal  to  the  proposed  tasks?  Has  it  the  needed  intelligence  , 
and  self-restraint?  Is  there  good  ground  for  expecting  that  great  ]i 
funds  coming  into  the  hands  of  public  officials  w^ill  be  well  handled? 
The  history  of  public  finance  gives  little  encouragement.  Capital 
sums  which  come  into  the  hands  of  the  state  are  usually  "bor- 
rowed" by  the  state  itself.  They  are  turned  over  to  some  depart- 
ment or  bureau,  and  then  spent.  The  money  sums  are  dissipated; 
no  permanent  material  gain  accrues,  still  less  any  spiritual  gain. 
It  is  easy  to  conceive  how  they  might  be  advantageously  spent  by 
the  bureau  to  which  they  are  assigned,  for  useful  public  works, 
needed  housing  projects,  great  educational  facilities.  But  it  is 
far  from  easy  to  prevent  their  dissipation  in  the  ordinary  course 
of  public  expenditure.  The  public  treasury  is  like  an  individual. 
What  an  individual  earns  bj-  hard  work,  he  is  likely  to  watch  with 
care,  to  conserve,  to  invest.  "\Miat  comes  to  him  thru  windfalls,  \ 
he  will  probably  spend  with  little  thought  and  perhaps  with  much  \ 
hilarity.    What  the  public  treasury  gets  by  methods  that  seem  to  be      \ 


272  THE  DISTRIBUTION  OF  WEALTH  [55-§8 

burdenless,  and  which  at  the  moment  are  quite  burdenless  for  the 
great  majority,  is  apt  to  be  thoughtlessly  applied  to  any  and  every 
fad.  The  sums  secured  thru  taxation  which  is  felt  to  be  bui*den- 
some  will  be  applied  much  more  critically  and  wisely.  In  both 
cases,  gains  easily  got  are  quickly  spent.  v 

And  even  if  the  sums  secured  by  the  gradual  appropriation  of 
inherited  property  were  rigorously  maintained  for  investment,  how 
wise  is  that  investment  likely  to  be?  The  American  business  man 
would  shrink  with  horror  from  the  prospect  of  a  vast  public  bureau, 
virtually  a  loan  bank,  making  advances  by  millions  and  billions  to 
borrowers  singled  out  by  elected  or  appointed  officials.  Not  merely 
the  economic  problems  and  economic  possibilities  have  to  be  con- 
sidered, but  the  far-reaching  questions  concerning  the  character  of 
the  community,  its  ability  to  reject  demagogs  and  to  enlist  good 
public  servants,  its  intelligence  in  holding  fast  to  good  policies 
and  good  legislation. 

This  sort  of  problem  and  this  sort  of  doubt  face  us  in  every  direc- 
tion. The  problem  is  one  of  the  capacity  of  a  democratic  commu- 
nity not  only  to  govern  itself  within  the  range  of  the  traditional 
functions,  but  to  perform  with  success  functions  much  more 
varied,  more  complicated,  more  exacting.  It  is  easy  to  sketch 
attractive  general  principles ;  it  is  very  difficult  to  devise  the  ma- 
chinery and  organization  for  their  execution  in  detail;  it  is  most 
difficult  of  all  to  assure  the  public  intelligence  and  public  spirit 
which  alone  can  supply  the  motive  power  for  successful  operation. 

There  is  little  prospect  that  limitations  on  inheritance  at  all  so 
revolutionary  as  discussed  in  this  section  will  be  applied  in  the  near 
future,  just  as  there  is  little  prospect  that  the  framework  of  the 
institution  of  private  property  will  be  completely  made  over. 
What  is  more  probable  is  a  further  extension  of  the  principle  of 
progression  in  the  taxation  of  inheritance,  a  cutting  down  of  great 
fortunes  by  this  process,  some  new  and  troublesome  problems  of 
public  finance.  Not  least,  there  will  be  a  tendency  to  curtailment 
of  the  community's  capital,  compensated  by  the  net  social  gain 
thru  the  mitigation  of  inequality  and  offset,  let  it  be  hoped,  by 
the  growth  of  capital  thru  the  ordinary  channels. 


55-§9]  INEQUALITY  AND  ITS  CAUSES  273 

§  9.  What  now  of  the  ulterior  question  —  the  basis  of  the  whole 
regime  of  private  property?  Something  may  be  said  on  this  topic 
here,  even  tho  the  consideration  of  the  closely  related  topic  of 
socialism  is  postponed  to  a  later  stage. ^ 

The  theory  that  property  rests  on  labor,  and  therefore  on  what 
is  conceived  to  be  the  "  natural "  right  of  each  man  to  that  which  he 
has  produced,  has  gone  into  the  lumber  room  of  discarded  doctrines. 
It  was  elaborated  by  Locke,  accepted  more  or  less  thru  the  eigh- 
teenth century,  and  used  freely  by  the  English  economists  of  the 
first  half  of  the  nineteenth  century.  But  it  plays  little  part  in 
modern  discussion.  "Natural"  rights  have  quite  gone  out  of 
fashion.  Where  there  is  a  highly  complex  division  of  labor,  such 
as  characterizes  existing  society,  it  is  impossible  to  distinguish  how 
much  any  one  individual  has  contributed  to  the  whole  output  — 
to  say,  this  is  his  specific  output,  therefore  rightly  his  property. 
Even  if  it  were  possible  so  to  distinguish,  no  natural  or  inherent 
right  would  thereby  be  established.  Least  of  all  is  it  possible  on 
such  reasoning  to  justify  inheritance.  As  the  institution  of  inheri- 
tance can  be  sustained  only  on  a  basis  of  utilitarianism,  so  can  that 
of  property  in  general. 

>The  utilitarian  reasoning  may  be  summarized  as  follows: 

Men  will  not  labor  steadily  and  effectively  except  in  their  own 
behalf.  LgJ^^^-^frsitlilgome,  the  sense  of  common  interest  weak. 
Labor  will  not"  be  exerted  continuously  and  vTgorousTy  excepfTor 
indiiddMLbei?efit.C.It  is,s±renumis-an4  well  directed  in  proportion 
to  the  expected  return.  ^     -^  ''-' '"'^  '-^'<~- 

This  indeed  is  the  crux  of  tfte  whole  matter.  If  it  be  believed 
that  the  sense  of  common  interest  is  deep  and  keen;  that  most  men 
will  be  actuated  by  a  strong  motive  of  service  for  all  their  fellow- 
men;  that  they  will  be  as  active  in  promoting  the  well-being  of  dis- 
tant strangers  as  of  their  kith  and  kin  —  then  one's  attitude 
toward  all  social  and  economic  problems  becomes  fundamentally 
different.  The  truth,  in  my  own  view,  is  that  tho  men  are  neither  ' 
exclusively  self-regarding,  as  the  extreme  hedonists  assume,  nor 
imbued  with  a  motive  of  service  at  all  adequate  as  an  impelling 

1  See  Chapters  66  and  67. 


274  THE  DISTRIBUTION  OF  WEALTH  [5&-§9 

force  for  sustained  productive  labor,  they  are  much  nearer  the 
first  extreme  than  the  second.  How  great  are  the  possibiHties  of 
modification  in  human  traits  thru  education,  environment,  a  finer 
pervasive  social  atmosphere,  we  do  not  know  nor  need  we  here 
speculate.  It  may  be  granted  that  the  possibilities  are  consid- 
erable; but  they  will  develop  slowly.  Men  are  now  actuated,  in 
the  ordinary  course  of  their  daily  lives,  chiefly  by  those  motives 
of  narrower  range  which  we  call  self-regarding,  and  they  will  long 
continue  to  be  so  actuated. 

Inequality  arises,  even  under  the  simplest  conditions,  from  the 
unequal  endowments  of  men.  It  becomes  accentuated  with  the 
growing  complexity  of  the  division  of  labor.  Wliere  there  is  no 
division  of  labor,  every  man  is  led  to  do  that  which  brings  to  him 
for  his  own  uses  the  largest  direct  return  to  labor.  In  a  varied 
society,  he  is  led  to  do  that  which  brings  indirectly  the  largest  re- 
turn; that  which  others  value  highly  and  for  which  they  will  pay 
highly.  Competition  and  self-interest  thus  promote  not  only  the 
vigor  of  labor,  but  the  effective  organization  of  production.  Above 
all,  as  the  industrial  situation  becomes  complex,  the  middleman 
appears  —  the  employer,  merchant,  banker;  indispensable  figures 
for  the  progress  of  industry.  Inequality  becomes  more  marked  as 
increasing  complexity  gives  play  to  very  varying  abilities.  Wliether 
due  to  differences  of  inborn  gifts  or  to  the  developing  differences 
that  arise  from  acquired  advantage,  it  remains  an  indispensable 
spur  to  the  full  exercise  of  each  man's  capacities. 

Wide  variations  thus  arise,  in  earnings,  possessions,  available 
surplus.  The  essence  of  capital  is  surplus. ^  Accumulation  takes 
place  by  many  individuals,  and  surplus  means  are  utilized  by  those 
who  see  time-using  ways  of  directing  labor  with  effect.  Sustained 
accumulation  and  investment  on  a  large  scale  will  not  take  place 
unless  there  be  an  inducement.  The  phenomenon  of  interest  on 
capital  appears.  Not  less  than  interest,  inheritance,  whatever  its 
historic  origin,  operates  as  an  indispensable  stimulus  to  the  saving 
of  private  means  and  the  increase  of  social  capital. 

So  the  leisure  class  emerges  —  the  result  of  inequality,  accumula- 

1  Compare  Chapter  5,  §  3. 


55-§  10]  INEQUALITY  AND  ITS  CAUSES  275 

tion,  interest,  inheritance.  The  immediate  effect  of  idleness  on  the 
part  of  a  fraction  of  the  community  is  obviously  to  lessen  the  total 
available  labor  force;  the  great  mass  must  work  not  only  for  their 
own  maintenance,  but  for  that  of  this  privileged  fraction.  But  the 
prospect  of  being  a  member  of  the  leisure  class  has  proved  a  won- 
derfully powerful  bait  to  effective  exertion  and  permanent  in- 
vestment. False  as  the  ideal  of  exemption  from  labor  seems  to  the 
thinking  few,  and  doubtful  as  may  be  the  happiness  of  those  born 
to  a  life  of  leisure,  the  hope  of  privileged  position  for  one's  self  or 
one's  kin  has  been  the  main  motive  force  for  the  material  progress 
of  society. 

Property  in  land  is  part  of  the  mechanism  for  stimulating  effec- 
tive labor  and  effective  investment.  Production  cannot  be  carried 
on  without  land;  all  plant  must  be  established  on  a  site.  Full  title 
and  ownership  to  land  have  been  indispensable  to  the  growth  of 
capital.  Such  unqualified  property  right  may  not  be  essential  in 
an  ideally  constructed  society;  and  the  possibilities  of  restriction 
in  existing  societies  may  be  greater  than  is  commonly  supposed; 
yet,  historically,  absolute  private  title  to  land  has  been  the  sure 
means  of  securing  its  effective  use.  Thus  rent  develops  as 
an  element  in  distribution,  in  part  intermingled  with  return 
on  capital  beyond  possibility  of  discrimination,  and  in  any 
case  an  inevitable  outgrowth  of  the  system  of  property  in  its 
cruder  stages. 

§  10.  The  reasoning  of  the  preceding  paragraphs,  followed  with- 
out flinching  and  without  qualification,  would  lead  to  the  con- 
clusion that  desert  on  the  part  of  members  of  the  leisure  class  is  not 
necessary  to  justify  the  existence  of  the  class.  Its  position  of  ease 
and  comfort  is  a  bait  to  stimulate  ambition  and  accumulation. 
Direct  service  by  the  survivors  and  descendants  of  fortune  founders 
would  seem  to  be  immaterial.  Yet  the  current  notions  of  justice, 
vague  tho  they  are,  connote  some  closer  relation  between  service 
and  reward;  and  the  question  persists  whether  the  personal 
qualities  of  the  privileged  and  their  immediate  contribution  to  the 
common  welfare  must  not  be  considered  in  any  solid  justification 
of  existing  inequality. 


276  THE  DISTRIBUTION  OF  WEALTH  [55-§  10 

The  question  is  answered  in  the  affirmative  by  many  thinkers,^ 
who  hold  that  there  must  be  a  continuing  service  from  the  class  as 
a  whole,  if  not  from  each  and  every  member.  It  is  pointed  out  that 
tho  the  origin  of  inequality  is  to  be  traced  to  the  unequal  endow- 
ments of  men,  it  is  to  be  sought  also  in  varying  services.  In  the 
earlier  stages  of  developing  stratification,  social  classes  —  whether 
priestly  or  feudal  or  industrial  —  sprang  up  because  some  indi- 
viduals were  in  a  greater  measure  serviceable  to  the  general  body. 
Not  merely  predatory  strength  and  cunning,  but  abilities  exercised 
in  a  manner  to  advance  the  common  good  explain  the  universal 
differentiation  of  society.  But  during  the  later  stages,  when  the 
superior  classes  have  attained  an  established  position  of  privilege, 
it  becomes  doubtful  whether  ability  and  service  are  maintained  and 
whether  the  justification  of  inequality  still  holds. 

Such  questions  go  to  the  foundations  of  the  theory  of  ethics.  On 
strict  hedonistic  principles,  it  may  be  consistently  maintained  that 
personal  desert  is  immaterial.  The  coolly  calculating  economist 
may  accept  the  idle  rich  as  inevitable  adjuncts  of  a  system  which 
is  itself  founded  on  the  intellectual  and  moral  limitations  of  men, 
and  he  may  leave  their  way  of  life  to  the  preacher.  I  will  not  under- 
take to  say  what  are  the  last  criteria  of  justice,  for  individuals  or  for 
society;  but  it  is  obvious  that  the  justification  of  inequality  and  of 
all  its  consequences  becomes  more  effective  when  the  leisure  class 
is  of  service  directlj^  as  well  as  indirectly.  Tho  the  mere  existence 
if  a  capitalistic  aristocracy  operates  to  spur  ambition  and  to  con- 
serve capital,  its  position  is  immensely  stronger  if  the  individual 
members  contribute  actively  to  the  general  well-being,  thru  con- 
tinued industrial  leadership,  thru  the  advancement  of  science,  liter- 
ature, and  art,  thru  genuine  public  service. 

Whether  contributions  of  this  sort  will,  in  fact,  be  rendered,  de- 
pends not  only  on  ability  (and  this  again  on  heredity),  but  on  the 
public  opinion  of  the  privileged  class  and  indeed  of  society  at  large. 
It  cannot  be  said  that  the  habits  and  ideals  of  the  rich  give  great 
promise.  t 

1  See,  for  example,  Schmoller,  Volkswirtschaftslehre,  Vol.  I,  pp.  409-411.  Cr>- 
Paulsen,  Ethik,  Book  IV,  Part  III,  Chapter  III,  §  3  (p.  713,  ed.  of  1889) :  and  Dewey 
and  Tufts,  Ethics,  Chapter  XXIII,  §§  1-3. 


55-§  10]  INEQUALITY  AND  ITS  CAUSES  277 

Rapine,  avarice,  expense. 
This  is  idolatry;  and  these  we  adore. 

Nor  are  the  ideals  of  the  great  mass  of  the  people  essentially  dif- 
ferent. They  are  not  at  heart  censorious  of  the  rich,  but  rather 
envious,  and  ready  to  imitate  bad  ways.  How  far  the  spread  of 
better  education  and  the  democratization  of  society  will  affect  the 
prevailing  ideals,  it  would  be  rash  to  predict.  Something  is  gained 
if  the  situation  is  laid  bare;  and  herein  the  growing  attention  to 
economic  and  social  subjects  promotes  improvement.  A  wide- 
spread understanding  of  economic  principles,  of  the  broad  facts  of 
social  stratification,  of  the  singular  position  of  the  privileged  few, 
of  the  public  loss  from  useless  lives,  of  the  fallaciousness  and  empti- 
ness of  the  talk  now  common  on  social  subjects  among  the  well-to- 
do  —  such  knowledge  may  do  something  to  spur  the  fortunate  to 
lead  lives  of  service.  Certain  it  is  that  the  opinions  of  most  per- 
sons, and  especially  of  those  imbued  with  some  sense  of  social  obli- 
gation, will  be  affected  by  the  immediate  and  visible  contributions 
which  the  members  of  the  leisure  class  may  make  to  the  general 
good. 

References  on  Book  V 

On  the  theory  of  distribution  in  general,  as  on  that  of  value,  the  first 
book  to  be  mentioned  is  A.  Marshall,  Principles  of  Economics,  Books  IV, 
V,  VI  (6th  ed.,  1910).  A  compact  and  able  theoretic  analysis  is  in  T.  N. 
Carver,  The  Distribution  of  Wealth  (1904).  On  the  national  dividend  and 
its  distribution,  and  also  on  the  topics  in  the  subsequent  parts  of  the  present 
book,  a  searching  treatment  is  in  A.  C.  Pigou,  The  Economics  of  Welfare 
(1920).  Entirely  different  in  method,  with  a  wealth  of  historical  and  sta- 
tistical analysis,  is  G.  SchmoUer,  Grxmdriss  der  Volkswirtschaftslehre,  Books 
III,  IV  (1900-1904;  French  translation,  1905-1908).  Still  different,  and 
proceeding  from  a  new  point  of  view,  is  J.  A.  Hobson,  Work  and  Wealth, 
(1914),  a  book  which  justifies  its  sub-title  —  "a  human  valuation." 

Among  the  many  modern  books  on  capital  and  interest,  Bohm-Bawerk, 
Positive  Theory  of  Capital  (English  translation,  1891),  has  greatly  influ- 
enced recent  economic  thought .  A  revised  edition  of  the  German  appeared 
in  1909.  Not  inferior  to  this  in  intellectual  incisiveness,  but  marked,  like 
it,  by  some  excess  of  refinement  and  subtlety,  are  I.  Fisher's  two  volmnes, 
The  Nature  of  Capital  and  Income  (1906),  and  The  Rate  of  Interest  (1907); 
and  G.  Cassel,  The  Nature  and  Necessity  of  Interest,  English  translation. 


278  THE  DISTRIBUTION  OF  WEALTH  [55-§  10 

London,  1900.  On  the  theory  of  interest  a  brilliant  statement  of  the  equali- 
zation of  choice  between  present  and  future  is  in  P.  H.  Wicksteed,  The 
Common  Sense  of  Political  Economy  (1910).  An  able  book  by  a  French 
thinker  is  A.  Landry,  L'mteret  du  Capital  (1904).  J.  B.  Clark,  The  Distri- 
bution of  Wealth  (1899),  sets  forth  a  theory  of  wages  and  interest  as  the 
specific  products  of  labor  and  capital;  I  find  myself  unable  to  accept  the 
reasoning,  but  to  some  economists  it  seems  conclusive.  An  attempt  to 
recast  the  theory  of  distribution  and  value  on  new  fines  is  Fetter,  Eco- 
nomic Principles  (1915).  On  the  theory  of  business  profits  an  able  dis- 
cussion, with  a  point  of  view  different  from  my  own,  is  by  F.  H.  Knight, 
Risk,  Uncertainty,  and  Profit  (1921). 

J.  Bonar,  Malthus  (1885),  gives  an  excellent  account  of  Malthus's  writ- 
ings and  of  the  earlier  controversy  about  his  doctrines.  A.  Dumont, 
Depopulation  et  civilisation  (1890),  not  a  book  of  the  first  rank,  states  the 
modern  French  view,  laying  stress  on  "social  capillarity"  as  explaining  the 
decline  in  the  birth  rate,  and  enlarging  on  the  desirability  of  an  increasing 
population.  E.  Levasseur,  La  Popidation  Frangaise  (1892),  Vol.  Ill,  Part 
I,  gives  a  good  summary  statement  on  the  increase  of  population  com- 
pared with  the  growth  of  wealth.  G.  Mayr,  Statistik  und  Gesellschaftslehre: 
Vol.  11, Bevdlkerxmgsstatistik  (1897),  Vol.  Ill,  Parti,  Moralstatistik  (1910), 
gives  a  model  summary  of  statistical  data  and  a  judicial  statement  on  ques- 
tions of  principle. 

On  inequality,  a  survey  of  the  literature  and  of  the  principles  involved, 
without  attempt  at  statistical  information,  is  in  H.  Dalton,  Some  Aspects 
of  the  Inequality  of  Incomes  in  Modern  Communities  (1920). 


BOOK   VI 

PROBLEMS  OF  LABOR 


CHAPTER  56 


The  Wages  System.    Strikes  and  the  Right  to  Strike 

Section  1.  Introductory.  Character  of  the  questions  in  this  book:  they 
involve  the  weighing  of  conflicting  elements,  and  are  affected  by  social 
sympathy,  281  —  Sec.  2.  The  wages  system  necessarily  involves  restric- 
tions on  the  individual's  freedom,  283  —  Sec.  3.  It  has  material  draw- 
backs and  spiritual  drawbacks,  yet  brings  a  net  balance  of  gain,  284  — 
Sec.  4.  A  strike  is  not  a  mere  cessation  of  work,  but  a  fighting  move. 
It  is  the  set-off  against  the  power  of  discharge,  287  —  Sec.  5.  Should 
the  right  to  strike  be  restricted?  290  —  Sec.  6.  Employee  representation: 
its  possibilities  and  its  hmitations,  295. 

§  1.  The  subjects  to  be  taken  up  in  this  Book  and  in  that  to 
follow  differ  in  important  respects  from  the  subjects  of  the  preced- 
ing Books.  They  call  in  less  degree  for  mere  description  and  analy- 
sis, in  greater  degree  for  a  judgment  on  the  value  of  existing  insti- 
tutions and  for  advice  on  reform.  Hence  the  conclusions  depend, 
more  than  with  previous  matters,  on  a  weighing  of  pros  and  cons. 
Many  of  the  doctrines  laid  down  hitherto  have  been  definite  and 
positive.  They  are  either  true  or  not  true.  Such  for  example  is 
the  case  with  the  principles  of  exchange,  of  international  trade,  of 
the  value  of  money  and  the  range  of  prices,  of  rent,  and  interest 
and  wages.  No  doubt  questions  of  policy  have  also  been  con- 
sidered, and  necessarily  have  led  to  some  balancing  of  conflict- 
ing considerations;  as  for  example  with  regard  to  banking  legisla- 
tion or  the  circumstances  under  which  protective  duties  may  be 
advantageous.  But  such  balancing  is  peculiarly  necessary  for  the 
social  questions  which  are  now  to  be  taken  up.  With  respect  to 
almost  all  of  them,  something  is  to  be  said  on  both  sides;  in  favor 
of  one  course  of  action  as  well  as  in  favor  of  an  opposite  course. 
No  law  can  be  laid  down  on  them,  and  no  conclusions  proved  by 
irrefragable  reasoning  or  convincing  testimony.  Almost  invariably 
there  will  be  room  for  some  difference  of  opinion.     Of  this  there  is 

281 


282  PROBLEMS  OF  LABOR  [56-§  1 

ample  evidence  in  the  wide  divergences  of  conclusions,  and  in  the 
bitter  controversies  on  problems  where  the  facts  are  undisputed. 

Again,  the  conclusions  reached  on  such  questions  are  immensely 
influenced  by  the  point  of  view.  It  makes  ali  the  difference  whether 
the  problems  are  approached  in  a  spirit  of  sj'mpathy  or  of  indif- 
ferentism.  A  great  deal  depends  on  the  warmth  of  one's  social 
feelings.  Some  men  are  born  with  a  spirit  of  fervid  altruism,  some 
with  but  the  slenderest  strain  of  a  moral  sense.  Between  persons 
of  widely  differing  temperaments  there  is  little  common  premise 
for  argument.  There  is  no  convincing  a  person  whose  whole  point 
of  view  is  different  from  your  own.  Largely,  no  doubt,  the  per- 
vading moral  atmosphere  tells.  Most  well-to-do  persons,  tho  by 
no  means  selfish  or  indifferent,  are  affected  by  their  class  feeling, 
and  are  unconsciously  disposed  to  be  antagonistic  to  measures  look- 
ing toward  equalization  of  opportunities  and  possessions.  It  is 
true  that  they  are  not  so  critical  and  antagonistic  as  they  were 
fifty  or  a  hundred  years  ago ;  for  the  spirit  of  the  time  is  becoming 
kinder,  more  reformatory,  more  widely  sympathetic.  None  the 
less,  an  underlying  opposition  to  schemes  for  social  equalization 
appears  among  the  possessing  classes,  and  not  least  among  the  busi- 
ness men  who  now  give  the  tone  to  these  classes.  On  the  other 
hand  the  representatives  of  the  less  prosperous  strata  of  society 
are  instinctively  in  an  attitude  of  opposition.  Most  things  in  the 
existing  order  of  property  and  competition  are  repugnant  to  them, 
regardless  of  the  beneficial  effects  of  that  order  and  the  inevitable 
concomitants  which  the  benefits  entail.  Here  again  is  a  cause  of 
differences  in  opinion  not  to  be  reconciled. 

In  this  Book  labor  problems  will  be  dealt  with;  in  the  next,  prob- 
lems of  public  control  and  the  reorganization  of  industry.  Both 
sets  of  problems  center  about  the  inequalities  of  wealth  and  the 
ways  of  mitigating  them.  I  shall  try  to  consider  these  knotty  mat- 
ters as  objectively  as  possible,  not  unimbued  with  the  spirit  of  so- 
cial sympathy,  yet  constrained  to  face  the  limitations  imposed  by 
men's  rooted  habits  and  traditions,  by  the  defects  of  governmental 
machinery,  most  of  all  by  the  moral  and  intellectual  weaknesses 
of  human  nature. 


56-§2]  THE  WAGES  SYSTEM  283 

§  2.  Most  labor  problems  center  about  the  relation  between 
employer  and  employed.  They  arise  in  connection  with  the  wages 
question  in  the  narrower  sense  —  the  question  of  the  remuneration, 
not  of  all  laborers,  but  of  those  hired  by  the  capitalist  employer. 
The  wages  sj^stem  in  this  form  is  so  familiar  that  its  existence  is 
commonly  accepted  as  a  matter  of  course.  Something  needs  to  be 
said  at  the  outset  on  the  grounds  for  its  existence,  on  its  benefits 
and  its  drawbacks. 

The  wages  system  as  it  stands  is  the  outcome  of  the  division  of 
labor;  and  its  present  most  pressmg"probIems  are  due  to  the  in- 
creasing complexity  which  characterizes  large-scale  production. 
In  ever  growing  measure  the  modern  development  of  industry  has 
necessitated  organization,  direction,  discipline,  —  single-minded 
management.  There^  must  be  a  guiding__and  coordihatjng  au- 
thority^- The  liberty  of  the  individual  workman  is  necessarily 
restricted.  He  cannot  have  the  freedom  in  settling  his  daily  rou- 
tme^which  is  possessed  by  the  independent  artisan  or  the  farmer. 
He  must  work  as  part  of  an  organization,  and  his  tasks,  his 
hours,  his  speed,  must  conform  to  the  plan  of  the  whole.  He  must 
obey  orders. 

This  limitation  of  freedom  is  often  regarded  as  a  special  char- 
-acteristic  of  enfpldying  capitalism  and  private  property.  But  it 
is  the  inevitable  result  of  highly  organized  production.  It  is  as 
pressing  under  public  ownership  of  industry  as  under  private;  it  is 
an  essential  condition  of  the  success  of  any  cooperative  organiza- 
tion by  the  workmen  themselves ;  it  could  not  but  be  as  marked  in 
a  completely  socialist  society  as  under  the  existing  regime.  What 
is  true  in  regard  to  its  bearing  on  the  present  wages  system  is  that 
this  system  has  made  the  necessity  plain  and  unmistakable;  for  it 
alone  has  developed  the  methods  of  large-scale  production  and  thus 
arrived  at  the  advantages  as  well  as  the  disadvantages  of  the  com- 
plex division  of  labor.  In  saying  this,  I  do  not  overlook  the  wide 
range  of  public  industry.  Public  industry  hitherto  has  developed 
no  system  or  plans  of  its  own  —  it  has  copied  the  essential  achieve- 
ments of  private  industry.  It,  is  private  management  that  has 
pointed  the  way  and  perfected  the  methods  of  securing  the 


284  PROBLEMS  OF  LABOR  [56-§3 

needed  organization,  discipline,  leadership.  In  so  far,  private  man- 
agement, and  with  it  private  property,  are  indispensable.  Most 
persons  of  the  well-to-do  classes  think  of  the  private  organization 
of  industry  as  inherently  and  forever  indispensable.  Itjs  not  so; 
but  the  unification  of  control  and  the  restriction  on  individual 
^  liberty  which  characterize  it  are  not  to  be  escaped.  In  this  sense 
)     a  wages  system  cannot  be  done  away  with. 

§  3.  The  wages  system  thus  entails  serious  drawbacks  under  any 
form  of  organization.  Whether  under  private  ownership  and 
management  or  any  of  the  non-private  forms,  the  interest  of  the 
laborer  in  his  work  cannot  be  as  direct,  as  strong,  as  personal,  as 
when  he  works  for  himself  and  under  no  one's  direction.  But  the 
drawbacks  are  beyond  doubt  greater  under  control  by  capitalist 
owners.  Capitalist  control  may  indeed  justify  itself  and  continue 
to  hold  its  own  thru  special  effectiveness  in  securing  the  essential 
advantages.  None  the  less  the  drawbacks  must  be  faced  and  every 
means  of  mitigating  them  sought. 

The  drawbacks  are  of  two  kinds:  material  and  spiritual.  The 
output  of  material  goods  is  smaller  than  it  might  be.  The  spiritual 
ills  are  greater  than  they  might  be.  The  happiness  of  living  is 
marred  by  many  incidents  of  the  wages  system  as  it  stands. 
\^..  The  failure  to  secure  the  maximum  of  effectiveness  and  of  prod- 
uct is  patent.  The  universal  testimony  is  that  hired  workmen 
do  not  do  as  much  as  they  readily  could.  To  state  it  more  accu- 
rately: unless  the  economic  dominance  of  the  employer  is  great 
and  his  power  of  enforcing  strenuous  labor  is  exercised  to  the  ut- 
most, the  workmen  fail  to  do  their  best  or  anything  like  it.  It  is 
not  merely  a  matter  of  "  making  work"  —  of  this  something  is  said 
elsewhere  ^  —  nor  is  it  primarily  a  matter  of  lazy  repugnance  to 
work.  These  factors  enter,  but  they  are  not  the  most  important. 
The  main  thing  is  that  hired  men  are  directly  interested,  not  in  their 
work,„but  in  their  wages.  What  they  turn  out  inures"l;b  the  em- 
ployer, not  in  any  visible  way  to  themselves.  The  far-away  pros- 
pect of  an  ultimate  enhancement  of  the  social  dividend,  their  own 
eventual  participation  in  that  dividend,  have  no  effect  on  their  im- 

1  See  Chapter  62,  §  3,  and  Chapter  57,  §  4. 


56-§3]  THE  WAGES  SYSTEM  285 

agination  or  their  conduct.  There  is  an  obvious  contrast  with  the 
attitude  of  the  farmer  or  artisan  who  becomes  the  owner  of 
that  to  which  he  apphes  his  labor.  Naturally  the  evil  is  less  where 
production  is  of  a  routine  kind,  where  output  can  be  accurately 
gauged  and  controlled,  where  machines  set  the  pace.  It  is  sur- 
prisingly large  even  under  these  conditions.  It  is  greatest  where 
much  must  be  left  to  individual  discretion.  And  it  is  great  thruout 
the  range  of  the  wages  system. 

This,  be  it  observed^  is  not  a  net  loss.  It  is  a  deduction  from  a 
conceivable  maximum.  It  is  a  drawback,  but  one  that  is  out- 
weighed by  the  gains  from  division  of  labor,  organization,  manage- 
ment. While  the  laborers  do  indeed  produce  less  than  if  they  did 
their  best  wholeheartedly,  they  produce  more  than  they  could 
without  the  wages  system.  Were  it  not  for  this  net  gain,  the  system 
would  not  have  developed.  The  capitalist  can  pay  the  hired  work- 
man, even  tho  he  works  with  half  spirit  only,  more  than  the  latter" 
can  earn  while  working  independently.  The  cobbler  cannot  do  as 
well  for  himself  as  he  can  when  hired  by  the  shoe  manufacturer. 
t  The  spiritual  loss  has  received  more  attention  of  late  years  — 
'^  one  of  the  many  signs  of  growing  attention  to  the  relation  between 
psychology  and  economics.  We  are  slowly  becoming  awake  to  the 
plain  and  simple  fact  that  the  happiness  of  all  men  is  immensely 
promoted  if  their  daily  work  be  made  interesting  and  pleasurable. 
Even  at  its  best  the  wages  system  tends  to  choke  that  source  of 
happiness.  At  its  worst,  man's  interest  is  not  at  all  in  his  daily  work ; 
his  spirit  and  his  personality  are  elsewhere.  The^more  the  "  drive  " 
method  is  followed,  in  an  endeavor  to  secure  by  threat  or  force  that 
which  is  not  spontaneously  given,  the  more  is  the  possible  material 
increment  from  the  drive  offset  by  the  spiritual  loss  of  the  driven. 
There  is  danger  of  exaggeration,  however,  in  all  this;  and  more- 
over there  are  some  questions  connected  with  it  concerning  which, 
in  the  present  state  of  our  knowledge,  we  must  speak  with  caution. 
The  exaggeration  comes  because  those  who  descant  on  the  losses 
of  human  happiness  are  themselves  persons  with  a  bent,  a  marked 
personality.  They  are  thinkers,  speculators,  writers;  they  have 
in  themselves  something  of  the  spirit  of  poets,  musicians,  artists, 


286  PROBLEMS  OF  LABOR  [56-§3 

inventors.  No  doubt  some  spark  of  individuality  and  creative 
instinct  is  in  each  and  every  one  of  us.  Only  in  a  small  minority, 
however,  does  it  call  insistently  for  expression.  Most  men  prob- 
ably are  not  made  unhappy  by  simple  and  monotonous  work  or  by 
direction  and  command.  The  charm  of  life  which  the  medieval 
artisan  is  supposed  to  have  had  is  much  exaggerated ;  and  so  is  the 
loss  of  happiness  from  prescribed  tasks.  The  temper  in  which  power 
is  exercised  is  more  inimical  to  happiness  than  the  fact  of  power.  . 
;:  Questions  of  a  different  kind,  on  which  we  must  speak  even  more 
/guardedly,  are  those  on  the  relation  between  the  present  distribu- 
tion of  control  and  the  qualifications  of  the  persons  who  now  exer- 
cise the  control.  That  there  are  differences  between  individuals  in 
their  powers  of  leadership  is  not  to  be  contested.  Some  are  born 
to  command,  others  to  obey;  some  are  happy  in  commanding, 
others  in  obeying.  But  are  those  in  command  of  industry  pe- 
culiarly fitted  for  leadership?  And  are  those  who  now  follow  them 
designated  by  nature  for  obedience?  Much  of  the  ordinary  talk 
of  the  well-to-do  implies  that  this  sort  of  natural  and  supposedly 
proper  division  of  places  now  exists.  Those  who  urge  sweeping 
changes,  on  the  other  hand,  commonly  ignore  the  very  existence  of 
the  problems  of  differentiation  and  selection.  Elsewhere,  when 
considering  a  related  topic,^  I  have  pointed  out  how  inconclusive  is 
our  information  on  the  whole  question  of  social  stratification.  It  is 
by  no  means  certain,  (even  tho  some  evidence  points  that  way,) 
that  the  possessing  classes  and  those  who  manage  industry  for  them 
are  by  nature  different  from  the  rank  and  file  of  hired  workmen. 
The  present  distribution  of  functions  may  not  be  in  accord  with  the 
abilities  and  the  personalities  of  the  several  participants.  Nor,  on 
the  other  hand,  is  it  at  all  certain  that  a  radically  different^  sociaI"~ 
system  would  bring  a  better  adjustment  of  tasks  to  abilities,  a 
fuller  attainment  of  this  condition  for  human  happiness. 

In  any  case  it  is  to  be  remarked  that  on  the  spiritual  side,  as.well 
as  on  the  material,  the  loss  of  human  happiness  under  the  wages 
system  is  again  no  net  loss.     The  fact  of  everyday  choice  indicates 

1  Business  profits  and  the  distribution  of  managing  ability  among  social  classes; 
see  Chapter  49,  §  3. 


56-§4]  THE  WAGES  SYSTEM  287 

that  it  is  not  so.  The  cobbler's  work  may  be  more  interesting, 
more  consciously  creative  than  that  of  the  machine  hand;  mo- 
notony and  routine  may  make  the  factory  dull  and  lifeless.  Never- 
theless, the  cobbler  will  leave  his  bench  and  take  his  place  in  the^ 
factory  if  his  factory  earnings  are  higher  —  higher  perhaps  by  a 
small  margin  only.  The_agricultural  worker,  tho  he  be  an  owner 
oj  a  secure  tenant,  drifts  to  the  town;  and  this  is  not  simply  because 
of  the  diversions  and  crowds  (which  serve  in  some  part  to  offset 
submission  to  orders  and  to  monotony  of  tasks)  but  because  his 
earnings  are  larger.  The  gain  in  output  and  thereby  in  earnings 
from  highly  organized  industry  is  so  great  as  to  offset  not  only  the 
material  loss  arising  from  uninterested  labor  but  such  spiritual  loss 
as  comes  from  repression  of  personality.  In  both  regards  the  prob- 
lemjsjiow  to  minimize  the  losses;  how  to  avoid  the  disadvantages 
of  complex  industry  while  retaining  the  advantages. 

It  is  sometimes  urged  that  there  is  no  such  choice  as  has  just 
been  mentioned.  Under  the  wages  system,  it  is  said,  there  is  com-  „ 
plete  lack  of  choice.  The  laborer  must  accept  employment  and 
submission;  he  cannot  escape  by  betaking  himself  to  work  under 
other  conditions.  And  true  it  is  that  when  once  the  transition  to 
the  new  order  is  accomplished,  once  the  system  is  established,  he 
has  usually  no  alternative.  But  that  it  has  been  established  at  all 
is  due  fundamentally  to  choices  which  have  been  repeatedly  exer- 
cised. True  it  is,  again,  that  the  history  of  modern  capitalism  is 
full  of  incidents  that  spell  compulsion  —  an  ousting  by  stress  of 
need  from  the  simpler,  perhaps  more  attractive  conditions  of  an 
older  day.  These,  none  the  less,  are  exceptions.  The  main  driv- 
mg  force  that  caused  the  older  conditions  to  be  superseded  has  -"-■ 
been  the  flocking  of  multitudes  of  men  to  workshops,  factories, 
towns  and  cities,  because  life  there  has  seemed  to  them,  on  the  whole, 
more  attractive.  Not  t\Tannical  power,  not  wage-slavery,  but  the 
silent^stained  exercise  of  preferences  explains  the  modern  indus- 
trial order  and  the  existing  wages  system. 

§  4.  I  pass  to  some  other  aspects  of  the  wages  system  on  which 
there  is  loose  thinking  and  vague  talk:  strikes  and  "the  right  to 
strike." 


288  PROBLEMS  OF  LABOR  [50-§4 

Tho  it  be  the  choice  of  more  attractive  conditions  which  explains 
the  drift  of  laborers  into  the  wages  system,  it  is  none  the  less  true 
that,  once  the  system  is  established  and  all  pervading,  the  choice 
becomes  for  the  time  being  a  restricted  one  and  always  remains  a 
difficult  one.  The  men  can  choose  only  between  one  empJoyer-^nd 
another;  between  work  at  wages  and  no  work  at  all.  In  the  right 
of  discharge,  in  the  power  of  saying  whether  a  man  shall  be  hired  or 
not  hired,  retained  or  turned  oflP,  the  employer  has  a  fearful  weapon. 
He  can  deprive  the  laborer,  for  the  time  being  at  least,  of  his  means 
of  support.  The  alternative  of  looking  elsewhere  for  employment 
is  more  or  less  precarious.  Against  the  weapon  of  discharge  the 
laborer  exercises  that  of  the  strike. 

A  strike  is  commonly  spoken  of  as  if  it  were  a  mere  refusal  by 
individuals  to  accept  the  terms  of  an  offer  to  enter  on  a  contract  of 
labor.  This  statement  is  sometimes  varied  by  describing  the 
strike  not  as  an  individual  but  as  a  collective  refusal  to  enter  on 
such  a  contract.     It  is  more  than  either  of  these.  JLt_isL_,a  .con- 

y^  certed  withdrawal  from  work  with  "the  design  of-securing-xeturn 
to  the  same  employment  under  better  conditions  than  are  offered 
at  the  time  by  employers.  The  betterment  of  the  conditions  may 
be  in  various  directions:  to  get  higher  wages,  to  prevent  a,  reduc- 
tion in  wages,  to  change  hours  or  other  conditions  of  work. 
But  the  intent  always  is  to  secure  satisfactory  terms  while  retain- 
ing the  positions,  not  to  leave  the  positions  and  go  elsewhere.  A 
strike  is  a  concerted  withdrawal  for  the  purpose  of  bringing  pres- 

ff'    sure  to  bear  toward  holding  the  same  job. 

This  is  not  merely  a  matter  of  definition.  It  is  one  of  recogniz- 
ing what  people  really  mean  and  intend,  even  tho  they  do  not 
formulate  with  precision  what  they  have  in  mind.  In  any  consid- 
eration of  proposals  to  restrict  the  right  to  strike  —  of  the  legal 
or  the  moral  aspects  of  the  problem  —  care  must  be  taken  to  un- 
derstand the  exact  situation. 
//  Restriction  of  the  right  to  strike  has  often  been  J)ppQsed  —  to 
give  an  example  of  befogged  controversy  • —  on  the  ground  tlia^^it 
would  condemn  men  to  a  sort  of  slavery.  To  deny  men  the  right 
to  strike,  it  is  said,  is  equivalent  to  holding  them  against  their  will 


56-§4]  THE  WAGES  SYSTEM  289 

to  their  places.  Nothing  of  the  sort  is  ever  contemplated  by  those 
who  propose  restriction;  nor  is  it  the  liberty  of  choosing  another 
occupation  which  is  in  fact  desired  by  those  who  go  on  strike.  The 
essence  of  the  strikers'  aim  is  to  retain  the  same  positions.  The 
strike  is  conceived  to  be  successful  when  the  strikers,  after  having 
left  in  a  body,  are  reinstated  on  the  terms  desired  by  themselves. 
If  another  employment  has  to  be  sought,  the  strike^  is  deemed  to. 
]ia\  e  failed,  exen  tho  the  new  employment  be  in  fact  secured,  nay 
even  tho  the  strikers  in  the  end  prove  to  be  better  off  at  their  new 
places.  In  other  words,  the  strike,  to  repeat,  is  a  way  of  exerting — ' 
pressure  toward  hjoldjng  the  ,^old_4Qb-.  The  pressure  means 
damage  to  employers,  perhaps  to  the  public,  probably  at  the 
outset  to  the  strikers  themselves;  these  being  in  their  own  eyes 
inevitable  incidents,  e\  en  tho  regrettable,  of  struggling  for  retain- 
ing their  places  on  acceptable  terms. 

The  familiar  attitude  of  strikers  toward  newcomers  and  com- 
petitors — "  strike-breakers  ' —  makes  plain  what  is  the  real  intent, 
the  real  situation.  The  strikers,  so  far  from  quitting  their  jobs 
and  saying  that  others  are  free  to  take  them  if  the  offered  terms  are 
found  satisfactory,  aim  above  all  to  prevent  others  from  replacing 
them  on  any  terms  whatever.  Persuasion,  appeals  to  class  feeling 
and  class  loyalty,  physical  violence,  are  resorted  to  in  order  to  keep 
away  the  interlopers.  A  peaceful  and  satisfactory  conduct  of  a 
strike  takes  place,  in  their  opinion,  when  no  endeavor  is  made  to 
fill  the  vacant  posts  and  when  both  sides  settle  down  to  a  process 
of  dull  waiting  and  sustained  negotiations. 

The  strike,  then,  is  a  tactical  procedure,  a  fighting  move.  It  is 
mainly  cherished,  mainly  used,  because  it  constitutes  by  far  the 
most  effective  weapon  which  hired  laborers  possess.  It  is  the  one 
great  set-off  against  the  powerful  weapon  which  is  in  the  employers' 
hands  —  the  right  of  discharge. 

How  great  is  Jhe  power  whirhJlie  right  of  discharge_puts  into  the-__ 
employers'  hands  is  little  understood  by  those  outside  the  indus- 
trial  struggle^  _'I3ieJearof  being  turned  on  the  streets  is  always  in  _^ 
Jthejmck  of  the  hired  workman's  mind.     Much  is  said  in  all  the 
books  on  economics"about  his  bargaining  disadvantages,  his  com- 


290  PROBLEMS  OF  LABOR  [56-§  5 

parative  immobility,  the  obstacles  in  the  way  of  his  readily  turning 
to  another  employment ;  much  is  also  said,  and  with  truthj  about_ 
the  influences  of  those  underlying  forces  which  determine  wa^es  and 
serve  in  the  end  to  check  the  bargaining  advantages  of  the  employer^^ 
No  general  statements  can  picture  adequately  the  ordinary  states_ 
of  feeling:  constant  uneasiness,  easily  intensified  to  terror,  on  the 
part  of  the  men;  consciousness  of  power  and  determination  to  hold 
power  among  the  so-called  masters.  Thejrightjo  discharge  pn 
the  employer's  part  probably  is  an  indispensable  part  of  the  pres- 
ent order  of  industry.  Tho  some  limitations  on  it  may  be  set, 
tho  abuses  may  be  checked,  it  is  essential  to  discipline  and  to  effec- 
tiveness in  production.  But  liability  to  abuse  there  is.  The  un- 
qualified right  is  cherished  by  employers  not  merely  because  es- 
sential for  discipline,  but  in  no  small  measure  because  it  satisfies 
the  instinct  for  domination.  That  very  spirit  of  domination  brings 
about  a  state  of  opposition  among  the  workmen,  and  this  in  turn 
a  cherishing  of  their  own  instrument  of  offense  and  defense  —  the 
strike.  Without  that  weapon  they  feel  themselves  helpless.  And 
since  men  tend  to  make  the  means  an  end,  the  strike  and  the  right 
to  strike  become  matters  not  merely  of  tactics  and  expediency  but 
of  principle.  As  the  right  of  discharge  is  regarded  by  employ er§^  as 
an  inalienab;e  right,  so  that  of  striking  comes^toJ)e_regarded  by 
the  men. 

§  5.  How  far  the  right  to  strike  shall  be  allowed  to  go,  what 
degree  of  pressure  the  law  shall  permit  to  be  exercised  by  strikers 
on  those  ready  to  take  their  places,  in  what  form  the  power  of  the 
law  shall  be  applied  —  these  are  questions  of  the  greatest  intri- 
cacy and  difficulty.  The  law  itself,  both  statute  law  and  judge- 
made  law,  is  in  a  state  of  flux  and  transition.  And  there  is  no 
underlying  set  of  principles  so  settled  as  to  constitute  a  firm  founda- 
tion for  legislation  and  adjudication.  In  the  last  analysis  all  de- 
pends on  one's  attitude  toward  the  existing  industrial  order.  He 
who  expects  and  desires  far-reaching  changes  toward  th?  remodel- 
ing of  the  social  structure  and  the  lessening  of  inequality,  will  favor 
a  wide  extension  of  the  right  to  strike;  since  this  is  a  means  of  cur- 
tailing the  power  of  employers  and  perhaps  paving  the  way  toward 


56-§5]  THE  WAGES  SYSTEM  291 

their  eventual  disestablishment.  He  who  regards  private  prop- 
erty and  employer  management  as  indispensable  and  unalterable 
will  insist  that  strikes  must  be  curbed.  On  this  matter,  as  on  many 
considered  in  the  pages  that  follow,  most  people  —  legislators  and 
judges  not  excepted  —  reason  from  premises  which  they  have  not 
formulated  and  of  which  indeed  they  are  hardly  conscious.  Their 
attitude  is  determined  once  for  all  by  their  prepossessions. 

Yet  there  are  some  considerations  important  for  the  legislative 
problems  involved  which  should  be  observed  irrespective  of  one's 
views  on  the  aim  and  ultimate  outcome  of  social  and  industrial 
development. 

Consider  the  strike  not  as  a  mere  withdrawal  from  work,  but  as 
a  tactical  move  designed  to  bring  complete  cessation  of  operations. 
Those  operations  may  be  of  vital  concern  to  the  community;  as 
for  example,  in  the  case  of  railways,  urban  transportation,  light, 
water.     Stoppage  may  mean  peril,  even  disaster.     On  the  other 
hand,  in  those  very  operations  the  tenure  of  the  employees  may 
be  comparatively  secure  and  the  power  of  discharge  regulated  and 
restricted.     Such  is  likely  to  be  the  case  in  industries  which  are  di- 
rectly under  public  management.     Public  officials  rarely  have  an 
unfettered  power  of  discharge.  By  custom  or  law  the  employee  who 
is  turned  off  has  a  right  to  hearing  and  to  some  sort  of  trial.     Some- 
thing of  this  sort  —  some  check  on  the  arbitrary  determination  of 
the  very  fact  of  employment  —  should  be  made  a  part  of  the  or- 
dinary Industrial  procedure.     It  Is  but  one  phase  of  what  is  de- 
sirable on  a  larger  scale  and  on  wider  grounds, ,  participation  by 
the  hired  workers  In  the  settlement  of  the  conditions  under  which 
they  work.     The  possibilities  and  also  the  limitations  of  such  par- 
ticipation will  be  considered  presently.     Assume  for  the  moment 
that  it  exists  in  effective  form.     Then  the  strike  and  the  right  to 
strike  have  a  different  aspect.     The  strike  Is  no  longer  indispensable 
as  a  weapon  for  securing  a  hearing,  for  combating  absolute  control 
over  employment.     The  community  Is  entitled  to  protect  itself 
against  efforts  to  stay  the  operation  of  vital  industries.     The  w^ork- 
men  may  be  required  not  to  strike,  in  the  sense  of  not  deliberately 
striving  to  bring  the  industry  to  a  standstill.     Precisely  what 


292  PROBLEMS  OF  LABOR  [56-§5 

forms  of  compulsion  shall  be  applied,  is  not  so  easy  to  say :  whether 
to  make  the  mere  concerted  cessation  of  work  a  punishable  offense, 
or  only  the  overt  endeavor  to  prevent  others  from  engaging  in  the 
work.  The  question  of  principle  is  on  the  right  to  strike :  shall  it_ 
be  restricted  at  all  where  the  employer  and  employee  are  no  longer 
separated  as  hostile  parties  dealing  with  each  other  at  arms'  length 
and  where  the  employer  himself  is  restricted  in  the  use  of  his  main 
weapon  of  domination? 

This  question  of  principle  is  most  clearly  presented  in  the  indus- 
tries managed  by  government.  The  community,  by  the  very 
circumstance  of  putting  them  under  public  management,  has  ex- 
pressed its  conviction  of  their  special  importance  for  the  public 
welfare.  Here  it  would  seem  incontestable  that  on  the  one  hand 
the  men  should  be  given  a  standing  in  the  administration  of  em- 
ployment, on  the  other  hand  that  they  should  not  be  given  a  free 
hand  in  stopping  the  wheels  of  industry. 

In  cases  where  there  is  not  public  management  and  yet  an  in- 
dustry whose  continued  operation  is  of  the  first  concern  to  the 
public,  the  Hue  between  public  and  non-public  industries  is  not 
easily  drawn. ^  Often  there  is  a  sort  of  half-way  arrangement  — 
private  management  controlled  and  regulated,  as  in  the  case  of  the 
so-called  "public  utilities."  Are  the  same  considerations  applic- 
able to  these  industries  under  direct  government  management? 
The  public  is  quite  as  much  concerned  in  the  continuous  operation 
of  a  railway  owned  by  a  corporation  as  of  one  publicly  owned.  The 
conditions  of  employment  and  the  right  of  discharge,  again,  may 
not  be  essentially  different  from  what  they  are  under  government 
management;  tho  in  this  respect  the  same  protection  of  the  men 
against  arbitrary  acts  is  by  no  means  so  readily  instituted  or  so 
easily  maintained.  On  the  other  hand,  it  may  be  reasonably  con- 
tended that  in  putting  or  leaving  an  industry  in  private  hands  the 
community  has  assumed  the  risks  and  the  consequences  of  that 
form  of  Industrial  organization.  Privateownership^_carneaJsdth-" 
it  the  seeds  of  conflict  —  the  inevitable  clash  between  those  who 
employ  and  those  who  are  employed.     Disguise  it  as  we  may, 

I  Compare  Chapter  64,  §  1. 


56-§5]  THE  WAGES  SYSTEM  293 

smooth  over  to  our  utmost,  adjust  where  we  can,  there  the  conflict 
is,  ever  hable  to  break  out.  To  this  danger  we  may  submit  only 
because  the  system  on  the  whole  is  supposed  to  bring  advantages 
more  than  countervailing.  If  private  management  of  j-ailways  is 
preferred  to  public,  the  ground  must  be  that  on  the  whole  it  works 
better;  that  the  spur  of  self-interest,  the  incitement  to  enterprise, 
the  freedom  from  political  entanglement,  cause  transportation  to 
be  better  conducted.  If  coal  mining  is  left  in  private  hands,  it  is 
because  there  also  private  industry  is  believed  to  supply  the  com- 
munity better  than  public  industry  would.  The  private  employer, 
however,  regards  the  business  as  his  own,  its  methods  of  man- 
agement as  subject  to  his  own  judgment  only.  It  is  almost  in- 
variably urged  by  him  and  his  spokesman  that  the  effective 
working  of  the  business  machine  depends  above  all  on  unfettered 
freedom  in  the  selection  and  tenure  of  employees.  So  long  as 
this  attitude  prevails,  the  workman  will  feel  in  turn  that  he  must 
retam  his  weapon  of  defense,  the  strike,  even  tho  it  entail  injury 
to  a  wide  circle  of  persons.  If  the  public  wishes  to  secure  the 
gains  which  accrue  from  private  property  and  private  manage- 
ment, it  must  accept  the  offsets  which  arise  from  strife  and 
stoppage.  To  restrict  the  right  to  strike  and  leave  absolute  con- 
trol of  employment  to  private  managers  is  to  give  strength  to  one 
side  and  take  it  away  from  the  other. 

All  the  preceding  has  been  stated  in  general  terms  —  terms  too 
general  to  meet  the  diversified  conditions  of  actual  affairs.  There 
are  gradations,  from  well-administered  public  industry  thru  quasi- 
public  and  publicly  controlled  corporations  all  the  way  to  the  far- 
thest extreme  of  unfettered  private  ownership  and  management. 
Public  industry  itself  is  by  no  means  invariably  conducted  in  a 
spirit  of  consideration  for  the  rank  and  file  of  the  staff.  It  hap- 
pens often  enough  that  the  officials  in  charge  accept  the  point 
of  view  and  the  methods  of  private  industry,  and  are  equally  in- 
tolerant of  any  derogation  of  their  power.  An  attitude  of  this 
sort  is  defended  on  the  ground  that  it  is  essential  for  the  main- 
tenance of  ^isciplirie;  nor  can  it  be  said  that  this  is  always  a  mere 
pretext.    At  all  events,  where  such  a  state  of  affairs  exists,  the 


294  PROBLEMS  OF  LABOR  [56- §  5 

strike  is  not  to  be  ruled  out  as  ipso  facto  a  punishable  offense,  on 
the  ground  that  the  industry  is  a  public  one.  On  the  other  hand 
it  is  quite  conceivable  that  a  quasi-public  corporation  —  private  in 
ownership  but  publicly  controlled  —  may  operate  under  a  modi- 
fication of  the  ways  of  private  industry  not  only  as  regards  charges 
and  profits,  but  as  regards  labor  policy  as  well.  The  conditions  of 
employment,  the  power  of  discharge,  the  discipline  of  the  staff, 
may  be  subject  to  such  regulation  as  would  be  expected  under  ideal 
public  management;  and  this  may  be  part  of  the  very  terms  under 
which  private  management  is  authorized.  When  this  is  the  case, 
the  strike  becomes  an  inadmissable  weapon.  The  public  has  then 
protected  the  employees  and  it  is  in  turn  entitled  to  protect  itself. 
The  reader  might  gather  from  the  preceding  discussion  the  im- 
pression that  discharge  and  strike  should  be  treated  as  cards  of 
equal  value  in  the  game  —  the  one  to  be  set  off  against  the  other, 
and  given  up  if  the  other  also  is  given  up.  No  such  mechanical 
method  of  dealing  with  the  problem  can  meet  its  complexities  or  rec- 
oncile the  convictions  and  prejudices  of  the  contending  parties. 
Xhe  right  to  strike  is  cherished  by  workmen  not  merely  as  a  means 
of  defense  under  unequal  conditions.  More  or  less  consciously, 
more  or  less  widely,  it  is  regarded  as  the  entering  wedge  for  radical 
readjustment.  Even  if  employers  were  to  consent  to  restrictions 
on  their  power  of  discharge,  contests  would  remain,  strikes  would 
brew.  And  on  the  other  hand,  discharge  is  but  one  of  the  matters 
in  which  the  employer's  absolute  rule  is  to  be  questioned.  Dis- 
charge is  conspicuous  because  it  is  the  outstanding  weapon.  But 
all  the  conditions  of  employment  may  be  subjected  to  some  degree 
of  control  if  control  is  to  be  applied  to  the  workman  also.  Not_ 
only  hiring  and  firing,  but  standards  of  wages,  piece  rates,  appor- 
tionment of  tasks,  the  powers  of  foremen,  shop  rules,  may  come  to 
be  settled  not  by  the  employer  at  his  untrammeled  discretion,  but 
by  conference,  agreement,  contract.  When  such  methods  of  set- 
tlement, such  participation  in  the  contract  of  employment,  are  es- 
tablished and  in  effective  operation^,  the  strike  may  be  subjected 
to  greater  restriction  than  can  be  imposed  in  their  absence.  It  is 
quite  conceivable  that  in  its  militant  sense  —  the  endeavor  to  stop 


56-§6]  THE  WAGES  SYSTEM  295 

operations  until  the  strikers  get  their  terms  —  it  shall  be  made  un- 
lawful. 

§  6.  The  tenor  of  the  preceding  discussion  is  in  favor  of  what  is 
vaguely  called  "industrial  democracy."  Works  Councils,  Indus- 
trial Councils,  Shop  Committees,  Employee  Representation  — 
these  are  the  names  of  various  arrangements  for  participation  by 
the  employees  in  some  at  least  of  the  problems  of  management. 
Each  particular  scheme  is  apt  to  be  considered  by  its  ardent  pro- 
ponents a  panacea,  capable  of  removing  all  social  ills.  No  device 
has  this  wonder-working  power.  The  best  hope  for  the  future 
lies_hi_a  successioa^of  reformatory  steps,  each  needing  to  prove 
itself  good  in  actual  experience.  Among  the  steps  deemed  prom- 
ising is  the  establishment  of  employee  representation  in  the  mak- 
ing and  especially  in  the  administering  of  the  labor  contract.  The 
plan  has  possibilities,  but  has  limitations  also.  Something  can  be 
accomplished  by  it,  but  too  much  must  not  be  expected. 

In  the  first  place  it  is  doubtful  whether  much  will  be  gained  as 
regards  those  evils  of  the  wages  system  which  were  considered  in  the 
earlier  sections  of  this  chapter.  Neither  the  material  nor  the  spir- 
itual drawbacks  of  the  system  are  likely  to  be  removed,  perhaps 
would  not  be  greatly  lessened.  It  is  hoped  by  many  advocates  of 
"industrial  democracy"  that,  once  representation  on  councils  or 
boards  is  established,  the  attitude  of  employees  toward  their  daily 
work  will  be  revolutionized.  The  men  will  feel  it  to  be  their  own, 
will  put  whole-souled  energy  into  it,  will  be  free  and  joyous  in  the 
exercise  of  their  faculties.  This  seems  to  me  quite  Utopian,  just 
as  similar  expectations  have  proved  to  be  with  regard  to  profit 
sharing  and  like  devices.  The  fact  that  a  man  has  a  vote  in 
choosing  a  labor  representative  on  a  council  or  that  he  attends  an 
assembly  where  labor  problems  are  considered,  is  not  likely  to 
affect  sensibly  his  attitude  toward  his  everyday  tasks.  It  may 
indeed  have  some  effect  toward  strengthening  other  factors  work- 
ing in  the  same  direction,  such  as  a  well-devised  and  well-admin- 
istered system  of  piece  or  task  wages,  and,  not  least,  a  steady 
policy  of  patience,  consideration,  goodwill,  on  the  emploj^er's  part. 
But  in  itself  this  bit  of  participation  will  have  a  negligible  influence. 


296  PROBLEMS  OF  LABOR  [56-§6 

The  factory  hand  or  the  railway  fireman  will  go  his  way  with  his  al- 
lotted work  much  as  before,  one  among  hundreds  or  thousands, 
disposed  primarily  to  "get  by"  in  conformity  with  the  regulations 
and  to  receive  his  stipulated  pay,  unaware  from  day  to  day  that 
anything  has  happened  to  affect  the  status  of  the  employee  class. 

Least  of  all  can  any  modification  be  expected  in  the  morale  of 
the  workmen  if  these  devices  are  used  as  maneuvers  against  their 
own  organizations.  Precisely  this  is  in  the  minds  of  many  em- 
ployers who  set  up  shop  councils.  They  expect  the  new  arrange- 
ment to  supersede  existing  unions  of  their  employees.  The  ex- 
pectation is  not  often  overtly  stated;  the  intrinsic  advantages  of 
the  new  arrangement  and  the  desire  to^^o  "what  is,rigiitll_are_/^ 
dwelt  on.  Doubtless  an  increase  of  working  effectiveness,  a  stim-  .^.^^^ 
ulation  of  the  men's  individual  efficiency,  are  hoped  for;  a  better 
a,nd  hapjpier  attitude  toward  the  daily  task  is  occasionally  thought 
of.  Yet  in  many  cases,  perhaps  in  most,  employers  expect  and 
intend,  in  the  United  States  at  least,  to  circumvent  and  replace  the 
labor  unions.  So  long  as  this  is  the  case  the  movement  in  my 
judgment  will  come  to  nothing.  Employee  representation  and 
the  labor  unions  are  by  no  means  incompatible.  On  the  contrary, 
the  successful  working  of  any  system  of  representation  depends  on 
the  very  existence  of  organization  among  the  men,  and  probably 
on  organization  outside  of  the  system  itself.  But  the  employer 
commonly  believes  the  two  things  incompatible;  and  the  employee 
himself  is  prone  so  to  believe.  As  long  as  mutual  suspicion  exists^ 
and  the  real  aim  is  disguised,  no  scheme  of  the  kind  will  have  the 
desired  results.  Moreover,  a  policy  of  opposition,  disguised  tho 
it  be,  cannot  be  concealed.  It  will  out,  however  denied  and  how- 
ever covered  over.  A  real  spirit  of  meeting  the  men  on  their  own 
ground  and  with  a  frank  recognition  of  their  own  methods  of 
joining  together  for  their  own  ends  —  this  is  indispensable. 

On  the  other  hand,  with  every  factor  favorable,  it  is  improbable 
that  any  scheme  of  representation  or  participation  will  extend  its 
scope  so  as  to  cover  the  whole  plan  of  management.  It  is  likely  to 
be  restricted  to  labor  management  in  the  narrow^er  sense  —  prob- 
lems of  employment  and  discharge,  rates  of  pay  and  standards  of 


56-§  G]  THE  WAGES  SYSTEM  297 

work,  the  relative  wages  of  different  groups  of  workers,  grievances 
p)etty  and  serious,  discipline  overdone  or  tyranny  meanly  exer- 
cised.    The  other  and  often  larger  problems  of  management  and 
administration  will  hardly  be  affected.     Probably  they  should  not 
be.     There  is  a  curious  range  of  extremes  in  the  expectations  en- 
tertained regarding  the  possibilities  of  arrangements  of  this  type. 
Hardheaded  employers  of  the  ordinary  money-hunting  type  look 
at  them  as  sops  to  Cerberus,  specious  concessions  meant  to  keep 
down  the  spirit  of  unrest.     Imaginative  and  idealistic  persons 
urge  their  installation  as  the  entering  wedges  toward  a  new  social 
order.     They  regard  the  councils  and  committees  as  the  first  stages 
toward  complete  control  by  the  rank  and  file  over  the  establish- 
ments in  which  they  work.     Neither  party  is  likely  to  witness  the 
outcome  it  expects.  The  fundameiitaJ4)roblenis  of  management  will 
long  remain  in  the  hands  of  a  select  few.     The  half-autocratic 
powers  which  the  capitalist  employers  have  possessed  will  indeed 
be  curbed.     They  will  be  under  control  not  only  as  regards  labor 
relatious,  but  as  regard  prices  and  the  public  interest  generally. 
But  it  is  improbable  that  there  will  be  a  revolutionary  change  in 
the  main  features  of  the  existing  industrial  organization.     The 
experiences  of  cooperative  production  point  to  nothing  so  conclu- 
sively as  to  the  improbability  of  any  early  passage  of  complete 
control  into  the  hands  of  the  manual  workmen.     Cooperative  pro- 
duction would  really  be  industrial  democracy.     The  instances  in 
which  it  has  been  successfully  carried  out  are,  however,  so  extraor- 
dinarily rare  that  they  serve  only  to  make  conspicuous  the  gen- 
eral failure.     The  dreams  of  radical  reformers  now  turn  rather  to 
socialism  —  a  complete  overturn  of  the  existing  order  —  mdus- 
trial  democracy  in  quite  a  different  sense.     The  possibilities  of  com-^ 
plete  reorganization  in  any  form  will  be  considered  in  later  chap- 
ters. ^    For  the  present  we  are  concerned  with  the  wages  system  as 
it  stands,  its  defects  and  the  ways  of  remedying  them.     Among        f 
the  remedial  measures  is  this  of  employee  representation :   not  a  CL^ 
cure-all  for  the  social  ills,  but  of  promise  toward  smoothing  the 
working  of  the  industrial  system  as  now  established. 

1  See  Chapter  61,  on  Cooperation;  and  Chaptors  66  and  67,  on  Socialism. 


CHAPTER  57 

Labor  Unions 

Section  1.  Bargaining  power  of  laborers  strengthened  by  unions.  Weakness 
of  the  single  laborer.  Immobility  of  labor;  lack  of  reserve  funds;  perish- 
ability, 298  —  Sec.  2.  Monopolistic  tendencies  of  trade  unions  of  skilled 
workers;  not  often  of  permanent  importance.  The  open  union,  such  as 
alone  can  develop  among  the  less  skilled,  a  potent  instrument  for  good,  301 
—  Sec.  3.  Closed  shop  or  open  shop?  A  strong  prima  facie  case  for  the 
closed  shop  with  the  open  union,  304  —  Sec.  4.  The  danger  of  a  check 
to  progress  and  efficiency  under  the  closed  shop.  Limitation  of  output; 
piece  work;  the  standard  rate;  labor-saving  appliances;  discipline,  306  — 
Sec.  5.  A  division  between  open  shop  and  closed  shop  not  unacceptable. 
Grounds  of  employers'  opposition  often  untenable.  The  question  of 
union  leadership  crucial,  310  —  Sec.  6.  The  scab  and  the  use  of  violence. 
The  tie-up,  313  —  Sec.  7.  The  unionist  movement  likely  to  extend,  and 
entitled  to  sympathy,  315. 

§  1.  The  labor-union  movement  is  modern.  It  is  mainly  a  eon- 
sequence  of  the  Industrial  Revolution  —  of  the  factory  system  and 
the  concentration  of  industry.  The  number  oT  persons  employed 
in  a  single  enterprise  and  under  a  single  employer  has  tended  to  be- 
come larger  and  larger.  Hence  personal  ties  between  employer 
and  employee  have  relaxed  or  disappeared,  and  bargaining  has 
become  more  impersonal  and  cold-blooded.  At  the  same  time 
concerted  action  by  employees  has  become  easier.  Combined 
with  this  economic  tendency  has  been  the  growth  of  democracy 
and  of  the  aspirations  that  go  with  democracy.  The  union  move- 
ment is  one  of  the  most  important  signs  of  social  unrest  and  social 
progress.  The  laborers  have  become  increasingly  dissatisfied  with 
a  condition  of  dependence.  They  wish  not  only  for  higher jyages, 
but  for  emancipation  from  semi-patriarchal  conditions.  They  de- 
mand that  wages  shall  not  be  settled  once  for  all  on  the  employer's 
offer,  but  by  a  contract  in  which  their  own  action  shall  play  an 

effective  part. 

298 


57-§l]  LABOR  UNIONS  299 

We  may  proceed  at  once  to  the  most  important  economic  ques- 
tion presented  by  labor  unions  —  their  possible  effect  on  wages. 
On  this  subject  it  might  have  been  said  fifty  years  ago  that  the 
opinions  of  economists  and  of  trade-unionists  were  far  apart;  for 
many  economists  then  maintained  that  unions  could  have  no  effect 
qn  wages,  while  the  unionists  themselves  ascribed  every  actual  rise 
in  wages  to  their  own  efforts.  The  labor  leaders  are  still  disposed 
to  lay  undue  stress  on  the  effects  of  concerted  action ;  but  a  middle 
ground  would  now  be  taken  by  most  economists. 

It  is  certain,^nd^ indeed  obvious,  that  the  bargaining  power  of 
hired  workmen  is  strengthened  by  their  acting  in  a  body.  Where 
an  employer  deals  with  a  hundred  workmen,  he  may  be  said  to  be 
hcundredfold^tronger  in  his  bargaining  position  than  a  single  work- 
man. The  difference  to  him  whether  one  of  his  men  goes  or  stays 
is  only  the  difference  between  100  and  99.  But  to  the  workman  the 
alternative  is  between  employment  and  —  for  the  moment,  at 
least  —  unemployment.  True,  the  w^orkman  may  turn  elsewhere; 
and  it  may  be  contended  that,  if  he  offers  his  labor  at  the  market 
rates,  he  will  get  employment  from  some  one  else.  Probably  he 
will;  but  only  after  an  interval,  and  with  more  or  less  uncertainty. 
It  need  not  be  said  again  how  powerful  is  the  weapon  which  the 
employer  possesses  in  the  threat  of  discharge  and  the  workman's 
fear  of  losing  his  job.  Where,  however,  all  his  workmen  present  a 
demand  at  once,  and  propose  to  quit  work  at  once,  he  is  in  a  cor- 
respondingly difficult  position.  Then  he,  too,  will  have  to  stop, 
and  for  the  moment  will  lose  Jm  job ;  and  he  will  soberly  consider 
whether  he  can  find  another  set  of  men  on  the  same  terms.  If  he 
offers  the  market  rate,  doubtless  he  can  secure  another  hundred; 
but,  like  the  individual  laborer,  only  after  an  interval,  and  with 
more  or  less  uncertainty  and  temporary  loss. 

The  advantage  possessed  by  the  large  employer  becomes  clear 
when  his  position  is  contrasted  with  that  of  one  hiring  but  a  single 
person,  or  very  few  persons.  The  typical  middle-class  house- 
holder, with  one  or  two  servants,  needs  each  servant  as  much  as  the 
servant  needs  him  or  her.  If  the  mistress  gives  notice,  doubtless  the 
cook  can  find  another  place  at  the  going  rates;  but  not  at  once  or 


300  PROBLEMS  OF  LABOR  [57- §  1 

without  inconvenience.  If  the  cook  gives  notice,  doubtless  the 
mistress  can  find  another  at  the  going  rates;  but  not  at  once,  and 
with  no  less  inconvenience.  Hence  in  a  country  like  the  United 
States,  where  the  number  of  well-to-do  persons  who  demand  do- 
mestic service  is  great  and  growing,  and  the  number  of  those  willing 
to  give  such  service  is  limited,^  wages  are  not  only  high  but  are  kept 
at  the  high  market  level  without  organization  among  the  sellers  of 
labor.  If  the  persons  wanting  such  service  commonly  maintained 
ten,  twenty,  a  hundred,  domestics  apiece,  the  situation  would  be 
different.  The  single  servant  would  then  be  weak  as  a  bargainer; 
and  tho  the  general  level  of  wages  would  doubtless  not  be  affected, 
the  probability  that  in  each  case  the  actual  pay  would  conform  to 
the  general  level  would  be  less. 

The  disadvantage  which  the  laborer  usually  has  to  face  in  bar- 
gaining is  due  not  only  to  the  fact /that  he  is  immobile  '■'—  cannot 
quickly  find  the  best  market  for  his  labor  —  buffo  lack  of  hisj:e>- 
serve  fund^  and  to  tlie  perishability  of  his  commodityT  In  all  these 
respetrfes  the  differencdiDetween  employer  and  employee  is  often  one 
of  degree  only;  it  is  none  the  less  of  vital  effect  on  their  relative 
positions.  Tho  the  workman,  as  well  as  the  capitalist,  may  have 
reserve  funds  on  which  to  fall  back  while  waiting  and  bargaining, 
they  are  usually  much  less  than  those  of  the  employer,  and  in  the 
case  of  most  unskilled  laborers  are  virtually  non-existent.  So  with 
perishability.  There  is  a  sense  in  which  the  employer  also  is  like 
the  vendor  of  a  perishable  commodity.  Machinery  and  tools  de- 
preciate while  idle,  thru  the  mere  lapse  of  time  and  thru  obso- 
lescence; stoppage  of  production,  for  a  "going  concern,"  means 
some  definite  loss.  But  it  is  even  more  true  of  the  laborer  that 
working  time  lost  is  irrevocably  lost.  As  regards  some  sorts  of 
exacting  mental  labor,  a  period  of  rest  perhaps  adds  in  the  end  to 
vigor  and  efficiency;  but  this  possibility  is  negligible  for  most  physi- 
cal labor.  If  a  man  is  out  of  work  for  a  day  or  a  week,  so  much  of 
his  earning  power  is  gone  once  for  all. 

Organization  and  concerted  action  among  workmen  enable  them, 
to  no  small  degree,  to  lessen  their  disabilities.     Labor  unions  can 

I  Compare  above,  Chapter  47,  §  1. 


57-§2]  LABOR  UNIONS  301 

do  much  to  mitigate  the  immobiHty  of  labpr^  by  collecting  infor- 
mation aFout  the  demand  ajid^bxajdlng.  their  members  in  reaching 
the  right  places.  Public  and  private  agencies  act  toward  the  same 
end;  tho  p^i^'ate  agencies,  managed  for  profit,  are  themselves  likely- 
to  take  advantage  of  the  laborers'  weakness.  Labor  unions,  by 
accumulating  funds,  give  their  members  a  better  chance  to  hold 
out  in  the  process  of  bargaining.  Most  important  of  all,  concerted 
action  in  stopping  work  makes  the  employer  feel  that  the  workmen 
are  as  necessary  to  him  as  he  to  them. 

Labor  organizations  are  thus  effective  toward  securing  "fair 
wages";  that  is,  the  current  or  market  rates  determined  under  the 
conditions  of  competition.  They  aid  in  enabling  the  laborers  to 
get,  in  each  particular  case,  the  wages  determined  by  the  full  com- 
petitive demand  for  the  special  sort  of  service;  and  they  aid  in 
bringing  the  general  level  of  wages  to  the  full  discounted  value  of 
the  product  of  labor  in  general'.  Under  the  regime  of  private  prop- 
erty and  competitive  industry,  this  is  doubtless  all  that  unionism 
can  achieve  in  raising  wages:  But  it  is  a  great  deal.  The  cur- 
rent or  fair  rate  of  wages  is  not  determined  automatically  or  with 
any  accurate  demarcation.  It  is  always  the  result  of  barg:aining,  _^_;2^ 
There  is  always  a  debatable  ground,  and  a  chance  for  maneuver* 
ing  by  both  parties.  _^_^^_^. 

§  2.  The  concrete  problems  connected  with  laboi/ unions  relate 
always  not  to  wages  in  general,  but  to  the  wages  of 'S  "paj-ticular 
group.  And  they  relate  usually  to  the  trade  union  as  distinguished 
from  the  more  generic  type,  the  labor  union.  The  trade  union, 
still  the  most  familiar  and  effective  form  of  organization,  is  made 
up  of  workmen  belonging  to  one  trade  or  to  a  group  of  trades  closely 
related.  The  wages  of  each  such  group  in  the  specific  case  depend 
on  the  play  of  demand  for  the  special  kind  of  service  rendered. 
Limit  the  supply  of  workmen  in  a  given  trade  or  group,  and  the 
chance  is  bettered  for  getting  higher  wages  in  that  set.  This  is 
what  the  trade  union  invariably  desires  to  bring  about.  The  most 
effective  organizations  are  those  of  the  skilled  workmen  —  the 
machinists,  bricklayers,  carpenters,  plumbers,  and  the  like.  These 
are  in  any  event  more  or  less  in  a  non-competing  group.     Their 


302  PROBLEMS  OF  LABOR  l57-§2 

semi-monopolistic  position,  tho  threatened  by  the  spread  of  educa- 
tion and  of  the  machine  processes,  is  still  strong,  and  is  sought  to 
be  maintained  by  various  devices.  The  number  of  apprentices  is 
limited.  Admission  to  the  union  is  restricted  by  high  initiation 
dues.  In  some  of  the  rougher  trades,  brutal  violence  is  threatened 
against  would-be  competitors.  Trade  schools  are  opposed.  The 
unionists  try  to  maintain  themselves  in  a  favored  place  as  compared 
with  the  rest  of  the  laborers. 

For  this  they  are  not,  humanly  speaking,  to  be  blamed;  but  they 
act  against  the  general  interest.  Capitalists  and  employers  are 
no  less  desirous  of  shutting  out  competition  and  securing  monopoly 
profits.  Either  sort  of  combination  works  against  the  general  good. 
Tho  unionism  as  a  movement  for  uplifting  the  laboring  class  at 
large  and  bettering  the  bargaining  conditions  for  all,  must  com- 
mand sympathy,  in  its  particular  manifestations  it  is  too  often 
undisguisedly  selfish,  and  so  causes  repulsion  even  among  its  warm- 
est friends. 

It  is  true  that  the  instances  of  monopoly  effective  thru  trade- 
union  exclusion  are  not  many,  and  are  tending  to  become  less. 
They  occur  chiefly  in  those  occupations  where  the  handicraft  is  still 
dominant.  Such  is  the  case,  for  example,  or. was  until  very  recently, 
with  the  glass  blowers.  They  had  a  tight  union,  succeeded  in  re- 
stricting apprentices,  limited  numbers,  and  secured  for  themselves 
unusually  high  wages.  As  machine  methods  come  to  prevail  and 
specialized  skill  counts  less  than  general  training  and  intelligence, 
it  becomes  more  and  more  difficult  to  maintain  such  monopolies. 
In  this  very  trade,  new  inventions  were  introduced  which  accom- 
plished by  machinery  what  could  formerly  be  done  only  by  the 
expert  glass  man  blowing  thru  his  tube.  None  the  less,  the 
skilled  workmen  as  a  class  still  jealously  guard,  tho  with  lessened 
prospects  of  success,  their  privileged  position  as  against  other 
workmen. 

It  is  a  significant  fact  that  this  restrictive  attitude  has  the  sym- 
pathy and  approval  of  workmen  in  general.  Most  workmen  are 
instinctively  protectionists.  Not  only  do  they  fear  unemployment 
thru  increase  of  competition,  but  they  generalize  from  the  partic- 


57-§2]  LABOR  UNIONS  303 

ular  case  and  assume  that  what  is  advantageous  to  some  laborers 
must  prove  advantageous  if  applied  to  all.  The  bracing  doctrine 
that  every  one  should  do  his  utmost  in  a  free  field  finds  as  little 
spontaneous  welcome  among  the  employed  as  among  the  employers. 

Evidently  the  objectionable  side  of  unionism  here  considered 
would  disappear  if  there  were  the  open  union;  that  is,  if  all  persons 
competent  to  do  the  work  were  admitted  freely  to  the  union.  The 
union  then  w^ould  be  an  organization  with  no  flavor  of  monopo- 
listic exclusion,  but  one  simply  for  mutual  aid  and  for  collective 
bargaining. 

This  is  the  usual  situation  in  the  unions  of  the  unskilled  or  partly 
skilled.  The  trade  union,  the  earliest  and  most  spontaneous  type, 
has  been  supplemented  by  a  great  development  of  labor  organi- 
zation in  the  lower  ranks,  both  among  factory  operatives  and 
among  the  miscellaneous  unskilled.  Especially  in  the  United 
States  there  has  been  a  wide  spread  of  organization  according  to 
mere  propinquity  of  occupation ;  as  for  example  among  the  motor- 
^^«aen  of  the  street  railways,  the  switchmen  on  railways,  the  long- 
shoremen ("dockers"  in  England),  and  the  freight  handlers,  the 
teamsters,  the  coal  heavers.  These  are  occupations  needing  at 
most  but  a  few  weeks  of  experience,  to  which  any  able-bodied  man 
can  turn.  The  unions  therefore  in  the  end  necessarily  become  open 
unions,  and  free  from  the  reproach  of  selfish  exclusiveness.  At  the 
same^time  they  affect  just  those  classes  of  workmen  who  are  as 
individuals  most  helpless.  Unionism  among  them,  so  long  as  it  is 
kept  free  from  the  taint  of  physical  brutality,  brings  a  great  pre- 
ponderance of  gain.  No  doubt,  their  leaders  are  sometimes  dema- 
gogs, "or  (worse)  traitors  ready  to  accept  bribes.  During  the 
earlier  and  formative  stages  of  organization,  they  overestimate 
the  gains  which  the  union  can  bring,  and  may  be  turbulent.  On 
the  whole  they  are  potent  instruments  for  good.  They  not  only 
improve  the  bargaining  position  of  their  members,  and  raise  their 
wages  so  far  as  this  factor  can  further  the  rise;  they  bring  also  edu- 
cational benefits.  During  the  last  generation,  workmen  of  these 
grades  in  the  United  States  have  been  largely  foreign  born,  often 
immigrants  but  lately  arrived.    For  these  the  trade  unions  have 


304  PROBLEMS  OF  LABOR  [57- §3 

been  great  schools,  and  with  all  their  narrowness  of  outlook  have 
been  helpful  in  the  process  of  uplift  and  amalgamation. 

In  .the  skilled  trades,  the  policy  of  opening  the  union  is  always 
resisted  as  long  as  possible.  At  the  same  time,  many  of  them  have 
learned,  and  most  of  them  probably  will  learn,  that  it  is  the  only 
safe  policy.  Exclusion  and  limitations,  as  means  of  forcing  wages 
in  particular  trades  to  an  abnormal  level,  bring  sooner  or  later  their 
own  breakdown.  Employers  are  put  to  their  wits'  ends  to  find 
and  train  outsiders  or  to  develop  improvements  w^hich  will  make 
it  possible  to  dispense  with  the  skilled  men.  The  spread  of  edu- 
cation, and  especially  of  manual  training,  combined  with  the  steady 
extension  of  machine  processes,  make  the  position  of  the  monopo- 
listic union  more  and  more  precarious.  Where  trade  schools  are 
established  —  and  notwithstanding  the  opposition  of  the  unions, 
they  are  steadily  extending,  and  will  extend  more  and  more  in  the 
future  —  the  unions  find  it  to  be  their  only  wise  policy  to  admit 
into  their  ranks  the  men  so  trained.  And  even  without  Trade^ 
schools,  unusually  high  wages  lead  a  multitude  of  employers  to  try 
to  get  on  without  the  expensive  unionists,  and  tempt  a  multitude 
of  other  workmen  to  try  their  hand  at  the  well-paid  jobs;  with,  the 
result  that  these  mutually  attracted  parties  get  together  and  de- 
prive the  union  of  its  monopoly.  Reluctantly  and  unwillingly, 
even  the  skilled  men  are  in  most  cases  driven  to  the  policy  of  the 
open  union. 

§  3.  The  most  hotly  debated  question  regarding  unionism  con- 
cerns the  closed  shop.  Shall  all  workmen  be  brought  together  in 
unions,  and  all  bargains  as  to  wages  arranged  by  union  represen- 
tatives? Shall  non-union  men  be  virtually  forced  to  join  the  or- 
ganizations by  being  shut  out  from  employment  unless  they  do  so? 
The  alternative  is  the  open  shop,  in  which  the  employers  deal  with 
their  laborers  individually,  or  at  least  deal  with  them  irrespective 
of  their  being  members  of  the  union. 

Evidently  the  closed  shop  is  a  powerful  weapon  in  support  of  the 
union  of  the  monopolistic  type.  If  the  members  not  only  refuse  to 
admit  newcomers  to  their  ranks,  but  refuse  to  work  in  a  shop  with 
them,  the  difficulties  of  getting  outsiders,  even  tho  these  be  tempted 


57-§3J  LABOR  UNIONS  305 

by  exceptionally  high  wages,  are  very  great.  In  almost  all  enter- 
prises the  employer  needs  a  trained  and  coordinated  staff.  If  the 
union  men  leave  in  a  body  whenever  he  employs  an  outsider, 
he  must  substitute  another  full  complement.  Even  if  the  work  is 
not  very  difficult  to  master,  and  if  plenty  of  outsiders  are  attracted 
by  the  wages  offered,  it  is  at  the  least  a  troublesome  matter  to  break 
them  in.  If  the  trade  be  a  skilled  one  and  training  in  it  hard 
to  secure,  the  union,  insisting  on  the  closed  shop,  has  the  situa- 
tion well  in  hand.  Only  extravagant  demands  will  lead  the  em- 
ployer to  break  with  them.  Ordinarily  he  will  prefer  to  join  with 
them,  pay  high  wages  to  keep  them  content,,  and  reimburse  himself 
by  high  prices  Jo  purchasers.  There  is  an  obvious  limit  to  this  pro- 
cess, in  the  conditions  of  demand  among  the  purchasers ;  but  if  the 
union  also  limits  access  to  its  ranks  by  restrictions  on  apprentices 
and  the  like  measures,  it  may  find  in  the  closed  shop  a  cause  —  tho 
in  large  part  also  the  result  —  of  a  profitable  monopoly  position. 

Suppose,  however,  that  with  the  closed  shop  there  is  the  open 
union.  This  would  remove  one  of  the  evils  ascribable  to  the  closed 
shop  —  the  creation,  or  at  least  reenforcement,  of  a  monopoly.  If 
alT  qualified  applicants  were  admitted  in  good  faith  to  the  union, 
the  primary  effect  of  the  closed  shop  would  be  simply  to  enforce^ 
collective  bargaining.  No  contracts  with  individual  workmen 
would  then  be  made.  All  bargains  on  wages  and  the  conditions 
of  labor  would  be  concluded  thru  union  representatives. 

The  case,  so  stated,  is  prima  facie  in  favor  of  the  closed  shop.  So 
much  follows  from  what  has  been  said  of  the  gains  secured  thru 
unions  by  laborers.  They  get  better  terms  by  bargaining  in  this 
way.  They  are  the  most  numerous  and  the  most  needy  members 
of  our  modern  societies;  what  improves  their  condition  increases 
most  surely  the  sum  of  human  welfare. 

Let  us  consider  more  closely,  however,  the  industrial  situation 
as  it  would  beJf^the_close_d  shop^jvere  universal.  A  great  power 
would  be  in  the  hands  of  the  workmen  or  of  their  representatives. 
That  power  would  be  by  no  means  confined  to  questions  of  rates 
of  wages.  The  very  settlement  of  wages  involves  many  other 
things;  not  only  wages  and  hours,  but  the  mode  of  payment,  pen- 


306  PROBLEMS  OF  LABOR  [57- §4 

alties,  fines,  and  numberless  details  of  administration  and  discipline. 
Where  a  trade  agreement  is  drawn  up  between  the  representatives 
of  emplo^^ers  and  employees,  it  is  never  a  simple  contract  dealing 
with  wages  alone;  it  covers,  necessarily,  a  multitude  of  matters  of 
organization.  In  any  case,  if  we  imagine  the  closed  shop  to  be 
universally  established,  one  fundamental  question  is  settled  for  the 
employer.  He  has  no  alternative  as  to  whom  he  shall  emglpy.  It 
must  be  members  of  the  union  or  no  one. 

The  question  whether  the  closed  shop,  with  the  open  union,  is 
to  the  advantage  of  society  depends  on  the  use  which  the  workmen 
make  of  the  power  which  is  given  them.  If  used  simply  to  streng- 
then bargaining  power  and  prevent  exploitation  (in  the  narrower 
sense  in  which  that  term  is  here  applicable),  unalloyed  good  ensues 
to  the  workman.  If^ised  to  hamper  industry,  there  is  mucli 
evil  also;  and,  unfortunately,  in  the  present  state  of  mind  of  work- 
men and  their  leaders,  there  is  so  much  reason  for  expecting 
evil  of  this  sort  that  no  dispassionate  observer,  however  strong  his 
sympathies  with  laborers,  can  look  forward  to  the  universal  closed 
shop  without  grave  misgiving.  .  The  grounds  for  this  feeling  need 
some  further  explanation. 

§  4.  The  inevitable  attitude  of  the  hired  workman,  as  already 
remarked,^  is  to  favor  arrangements  that  seem  to  make  work  and 
to  oppose  those  that  seem  to  lessen  work.  Every  improvement, 
every  labor-saving  device,  means  some  shifting  and  readjust- 
ment, and  hence  commonly  entails  hardship  —  perhaps  tempo- 
rary, but  hardship,  none  the  less.  Once  settled  in  a  job,  the 
workman  wishes  it  to  last. 

One  familiar  manifestation  of  this  attitude  is  the_IimitatioB-of~- 
output;  that  is, the  limitation  of  the  amount  a  man  shall  accomplish 
in  a  given  time,  as,  for  example,  the  number  of  bricks  he  shall  lay 
in  a  day.  Such  restriction  is  often  defended  on  the  ground  tha.tjt 
prevents  "driving  "  —  the  requirement  of  excessive  stints  by  em- 
ployers. Very  likely  there  is  a  case  to  be  made  in  favor  of  it  on  this 
ground.  In  the  great  majority  of  instances,  however,  it  is  simply 
a  mode  of  making  the  job  last,  and  so  a  check  on  vigor  andefiiciency. 

1  See  Chapter  52,  §  3. 


57-§4]  "    LABOR  UNIONS  307 

It  lessens  the  product  of  industry.  Moreover,  it  saps  the  spirit  of 
willing  and  cheerful  activity,  and  so  contributes  still  more  to  those 
factors  —  in  any  case  many  and  unfavorable  —  that  make  labor 
irksome. 

So  it  is  as  regards  piec pwnrk  The  workmen,  individually  or 
when  gathered  in  unions,  oppose  it.  Here,  too,  the  ostensible 
ground  of  opposition  is  often  that  piecework  leads  to  "driving." 
The  rate  of  pay  is  alleged  to  be  based  on  the  capacity  of  some  un- 
usually strong  or  skilled  workman,  which  is  then  used  by  the  em- 
ployer as  a  ground  for  urging  the  average  man  to  extreme  exertion. 
Beyond  doubt  it  happens  that  piecework  is  thus  used  as  a  device 
for  getting  too  much  w^ork,  or  at  all  events  more  work  at  the  same 
pay;  and  this  supplies  one  instance  more  of  the  individual  laborer's 
disadvantages  in  bargaining.  But,  after  all,  the  underlying  feeling 
about  piecework  is  that  it  increases  output,  and  so  seems  to  lessen 
the  amount  of  work:  to Jbe  done.  . 

Something  of  the  same  sort  appears  in  the  demand  for  a  stand- 
ard rate  of  wages ;  tho  in  this  case  much  more  is  to  be  said  in  favor 
of  the  trade-union  policy.  Strictly  speaking,  that  policy  is  for  es- 
tablishing not  a  standard  but  a  minimum  rate,  less  than  which  no 
member  may  accept.  In  practise,  however,  the  minimum  rate  is 
apt  to  be  the  uniform  rate.  The  general  drift  among  trade  unions 
isagainst  differenc£s,_and  so  against -any  higher  scale  of  wages  for_ 
the  capable  and  strenuous.  This  drift  may  be  due  partly  to  a  wide- 
spread egalitarian  feeling,  a  vague  questioning  of  the  intrinsic 
righteousness  of  that  adjustment  of  reward  to  efficiency  which  fol- 
lows from  the  strict  individualistic  principle.  Mainly  it  is  due  to 
the  same  feeling  that  underlies  limitation  of  output  and  opposition 
to  piece  pay  —  a  fear  that  the  highly  paid  man  will  accotQplish 
much,  and  so  will  leave  less  work  to  do  for  the  rest. 

On  the  other  hand,  the  unflinching  adherence  to  a  standard  rate, 
and  even  to  a  unifornLiate,  is. to  be  defended  on  the  ground  that  it 
strengthens  bargaining  power.  In  the  absence  of  a  uniform  scale, 
many  an  employer  will  try  to  whittle  away  a  rate  that  is  supposed 
to  be  established,  by  special  agreement  made  with  (and  in  practise 
perhaps  forced  upon)  a  particular  workman  or  set  of  workmen. 


308  PROBLEMS  OF  LABOR  [57-§4 

Any  sort  of  discrimination  or  classification,  tho  ostensibly  in  favor 
of  the  highly  efficient,  gives  color  to  discrimination  against  those 
who  are  supposed  to  be  less  efficient,  but  who  in  fact  may  be  simply 
less  able  to  resist.  It  is  probable,  moreover^  that  the  differences 
in  individual  capacity  between  able-bodied  manual  workmen  are 
not  very  great,  and  that  the  deadening  influence  which  is  alleged  to 
be  exerted  by  the  standard-rate  policy  is,  in  practise,  no  great  mat- 
ter. Hence  this  policy,  much  as  it  has  been  condemned  by  those 
who  see  only  the  bad  side  of  unionism,  has  probably  done  little  to 
fetter  general  efficiency,  and  has  done  something  to  aid  the  unions 
to  maintain  themselves  against  covert  attack. 

The  opposition  to  labor-saving  improvements  and  machinery 
rests  unmistakably  on  the  same  ground  as  underlies  more  obscurely 
limitation  of  output  and  opposition  to  piecework  —  namely,  the 
dread  of  unemployment.  All  hired  workmen  (barring  perhaps 
agricultural  laborers  under  some  conditions)  dread  such  improve- 
ments. In  the  old  days,  they  rioted,  and  destroyed  the  hated  com- 
petitors. In  modern  times,  a  silent,  stolid  resistance  is  apt  to 
appear,  with  ahalf-conscious  endeavor  to  prevent  the  new  devices 
from  working  successfully.  It  is  true  that  many  labor  leaders  and 
labor  unions  have  given  up  the  policy  of  opposing  improvements 
and  machines,  and  advise  the  members  to  accept  them  and  to  be- 
come proficient  with  them;  this  is  simply  because  they  submit  to 
what  experience  has  shown  to  be  inevitable.  If  the  closed  shop 
w^ere  the  universal  rule,  no  entering  wedge  would  exist  for  compel- 
ling acceptance  of  the  better  methods. 

The  attitude  both  of  employers  and  workmen,  as  regards  inven- 
tions and  improvements,  is  naturally  that  of  trying  to  appropriate, 
each  party  for  itself,  the  whole  gain.  The  employers  try  to  hire 
the  men  at  the  existing  rates  of  pay,  to  sell  the  products  for  the  ex- 
isting prices,  and  to  pocket  a  higher  profit.  The  men  —  once  they 
have  made  up  their  minds  to  accept  the  new  ways  —  try  to  get  for 
themselves  part  of  the  gain.  Neither  party  thinks  of  the  public, 
and  each  is  apt  to  talk  of  the  "justice"  of  having  the  benefit  go  to 
one  or  the  other.  Justice,  in  the  sense  of  promotion  of  general  weU- 
being,  demands  that  the  gain  shall  go  to  the  community,  in  the  form 


57-§4]  LABOR  UNIONS  309 

of  more  abundant  production  and  lower  prices;  which,  of  course, 
is  the  result  of  competition  among  the  producers  and  especially 
among  the  employers.  If  there  is  not  competition,  but  monopoly, 
the  workmen  might  as  well  gain  as  the  employers.  All  experi- 
ence shows  that  the  benefit  from  improvements,  tho  accruing 
first  as  higher  profits  to  the  innovating  capitalists,  in  time  filters 
thru  to  the  community.  On  the  other  hand,  but  for  the  prospect 
of  higher  profits  (for  a  longer  or  shorter  interval)  employers 
would  have  no  inducement  to  work  out  the  improvements.  In 
this  sense,  it  may  be  said  that  the  employers,  rather  than  the 
workmen,  are  "entitled"  to  the  gains  of  the  period  of  transition. 
Stated  more  simply  and  with  less  misleading  phrase,  the  truth  is 
that  the  immediate  interests  of  the  employers  are  more,  in  accord 
with  those  of  the  public  than  are  those  of  any  one  group  of  work- 
men. 

The  same  general  remarks  are  to  be  made  of  the  attitude  of 
workmen  and  unions  toward  discipline.  The  large-scale  indus- 
tries of  our  day  call  for  semi-military  organization  —  for  punctu- 
ality, prompt  obedience,  submission  to  orders.  Discipline  in  the 
employers'  hands  rests,  on  the  power  of  discharge.  That  power 
the  workman  naturally  resents  —  as  naturally  as  he  resents  ma- 
chinery that  threatens  to  deprive  him  of  work.  The  strong  union 
tends  to  hamper  it,  and  the  universal  closed  shop  would  tend  still 
more  to  hamper  it.  All  depends  on  the  character,  intelligence, 
temper,  of  the  men.  The  clannishness  of  class,  and  the  sympathy 
of  the  great  majority  of  men  in  all  walks  of  life  for  those  who  have 
been  "  caught,"always  bring  a  danger  that  the  needful  effectiveness 
of  discharge  will  be  broken  down.^ 

Of  the  various  objectionable  policies  of  trade  unions,  those  which 
hamper  progress  seem  to  have  had  most  effect  in  Great JBritain, 
those  which  fetter  discipline  most  in  the  United  States.  In  the 
former  country^  unions  have  reached  their  fullest  development, 
and  collective  bargaining  is  most  widely  practised.  In  many  Brit- 
ish trades,  it  no  longer  occurs  to  any  one  that  the  individual  w^ork- 
man  shall  bargain  with  the  employer;  all  is  done  thru  the  union. 

1  See,  for  illustration,  Fitch,  The  Steel  Workers,  pp.  102-103. 


310  PROBLEMS  OF  LABOR  [57-§  5 

This  growth,  in  many  ways  gratifying,  does  seem  to  have  been  ac- 
companjed-in  Great  Britain  by  a  check  on  progress,  chiefly  thru 
limitation  on  output  and  silent  but  effective  opposition  to  labor- 
saving  appliances.  The  failure  of  Great  Britain  to  maintain  her 
former  leadership  in  some  industries,  such  as  tLatjiLiron_aiid-Steel 
making,  is  due  in  part  to  union  policies  which  have  put  a  brake  on 
progress.  In  the  United  States,  this  sort  of  influence  has  been 
little  felt;  partly  perhaps  because  of  the  ingrained  habit  of  accept- 
ing and  welcoming  improvements,  but  probably  in  the  larger  part 
because  unionism  has  hardly  ever  had  complete  sway  in  any  indus- 
try. A  demorajization  of  discipline  has  been  much  more  common 
in  this  country,  especially  in  railways  and  similar  industries,  and 
has  had  more  serious  effects. 

§  5.  This  prolonged  discussion  leads,  so  far  as  the  closed  shop  is 
concerned,  to  a  compromise  result.  It  is  undesirable,  with  the 
present  temper  and  intelligence  of  the  workmen,  that  they  should 
have  that  degree  of  control  which  the  universal  closed  shop  would 
give.  Yet  it  is  no  less  undesirable  that  the  employers  should  have 
that  degree  of  control  which  the  universal  open  shop  would  give. 
The  situation  as  it  actually  stands  in  many  industries  in  the  United 
States  is  not  unsatisfactory  —  partly  open  shops,  partly  closed 
shops.  The  existence  of  the  open  shops  prevents  the  union  from 
carrying  their  policies  to  the  pomt  of  harmful  restriction;  they  must 
face  the  competition  of  the  unfettered  establishments.  The  exist- 
ence of  the  closed  shops  prevents  the  employers  from  abusing  the 
advantage  which  the}'  have  in  dealing  with  unorganized  workmen; 
they  must  face  the  possibility  of  unionization. 

It  seems  to  be  better,  however,  that  no  individual  shop  should 
be  half  open  and  half  closed  —  employing  half  union  men  and  half 
non-union.  Employers  sometimes  take  the  position  that  while 
they  will  make  no  opposition  to  union  membership  on  the  part  of 
their  men,  they  will  not  accede  to  the  strict  closed  shop,  which 
would  compel  all  to  join  the  union  as  a  condition  of  being  employed. 
This  plan  of  letting  the  men  do  as  thej^  please  —  join  or  not  join  — 
rarely  works  well.  So  eager  and  vehement  is  the  unionist  spirit 
that  where  the  movement  has  once  taken  hold,  there  is  constant 


57-§5]  LABOR  UNIONS  311 

nsLggiag  of  the  non-JinioiiJiien.  Their  lives,  and  the  lives  of  their 
>35dves-and  children,  are  apt  to  be  made  miserable.  Better  one 
thing  or  the  other  —  either  the  closed  shop,  with  the  possibility 
that  the  employers  will  "smash  the  union"  if  it  becomes  intoler- 
ablj^  restrictive ;  or  the  open  shop,  with  the  possibility  that  the  em- 
ployees will  strike  and  unionize  if  they  are  not  dealt  with  fairly. 

This  sort  of  compromise  conclusion  is  equally  unwelcome  to  both 
sides.  Unionism  is  the  gospel  of  the  labor  leaders.  It  has  the 
sympathy  of  the  great  mass  of  the  workmen,  whether  they  be 
unionists  or  not;  its  universal  extension  is  their  goal.  To  most 
employers,  on  the  other  hand,  unions  and  closed  shops  are 
anathema,  and  in  fighting  for  the  open  shop  they  believe  they  are 
acting  not  only  in  their  own  interest  but  for  the  better  social 
order.  Even  the  most  humane  and  public-spirited  among  employ- 
ers commonly  have  this  feeling.  The  bitter  opposition  with  which 
such  emplo^'ersJace-the-union  movement  is  no  doubt  due  in  part  to 
the  mistakes  and  extravagances,  of  the  workmen;  extravagances 
not  only  in  their  endeavors  to  restrict  and  control,  but  in  their  bear- 
ing  and  temper.  The  union  leader,  if  he  thinks  he  has  the  situation 
in  hand,  feels  the  itch  of  power,  and  gives  his  orders  in  terms  which 
the  employeiifinds  intolerable.  In  no  small  part  the  resentment 
of  the  employer  arises  from  his  own  love  of  power.  Human  nature 
plays  its  part  on  both  sides,  often  more  than  any  close  weighing  of 
gains  and  losses.  The  generous-minded  employer,  disposed  to  do 
the  best  he  can  for  his  men,  yet  wishes  to  do  it  in  his  own  way.  He 
likes  to  have  a  patriarchal  position;  and  precisely  this  is  what  the 
workmen  tend  more  and  more  to  resent.  They  wish  to  be  dealt 
with  as  equals,  and  to  feel  that  they  are  in  a  position  to  command 
such  treatment.  No  doubt,  the  business  man  who  is  tactful  as 
well  as  humane,  who  meets  his  employees  as  men,  and  who  has 
enough  ability  and  success  to  be  able  to  pay  full  market  wages 
without  bickering,  can  carry  on  the  open  shop  indefinitely  without 
ever  having  "trouble."  It  is  well  that  a  good  part  of  the  com- 
munity's industry  should  remain  under  the  leadership  of  men  of 
this  tj'pe.  But  even  the  best  of  men  are  better  when  they  know 
that  it  is  politic  to  be  good,  and  the  best  of  employers  run  the  open 

■''    "i 
/ 


312  PROBLEMS  OF  LABOR  l57-§5 

shop  better  when  they  know  that  the  closed  shop  is  a  possibiHty, 
A  great  many  employers  are  not  of  the  best  type,  and  as  regards 
them  the  closed  shop  is  a  needed  alternative. 

A  common  contention  among  employers  opposed  to  unionism 
is  that  they  will  deal  only  with  their  own  men,  not  with  any  out- 
sider. In  this  respect  they  seem  to  be  quite  in  the  wrong;  or,  to 
state  it  more  carefully,  the  balance  of  social  advantage  is  against 
such  a  procedure.  The  workmen  clearly  gain  by  having  their  case 
in  charge  of  chosen  representatives,  whether  or  no  these  be  fellow 
employees;  and  collective  bargaining  and  unionization  up  to  this 
point  surely  bring  no  offsetting  disadvantages  to  society.  As  to  the 
immediate  employees,  there  is  often  a  real  danger  that  he  who  pre- 
sents a  demand  or  a  grievance  will  be  "victimized."  He  will  be 
discharged  and  perhaps  blacklisted;  very  likely  on  some  pretext, 
but  in  fact  because  he  has  "made  trouble."  Further,  the  ability 
to  state  and  argue  the  workmen's  case  and  to  negotiate  with  suc- 
cess, is  possessed  by  few.  No  doubt  it  often  happens  that  the  labor 
representatives  do  not  themselves  have  the  needed  ability  or  under- 
standing and  prove  inconvenient  persons  to  deal  with.  Some- 
times, as  has  already  been  remarked,  they  feel  the  itch  of  power 
and  like  to  pose  as  persons  whose  orders  must  be  obeyed.  But  they 
are  the  best  the  men  can  find,  and  in  the  long  run  it  is  advantageous 
that  they,  rather  than  immediate  employees,  should  conduct  ne- 
gotiations. The  only  case  in  which  an  employer  is  clearly  justified 
on  grounds  of  social  advantage  in  refusing  to  deal  with  them,  is 
where  they  are  corrupt.  This  case,  unfortunately,  is  not  un- 
known —  when  labor  leaders  are  willing  to  be  bribed ;  tho  the 
cases  are  quite  as  common  where  employers  are  willing  to  bribe. 
The  fact  that  a  labor  representative  is  found  to  be  a  blatant 
demagog  or  to  present  impossible  demands,  may  be  reason  for 
promptly  closing  negotiations,  but  is  no  ground  for  refusing  to 
meet  him  if  once  he  has  been  chosen  by  the  workmen  to  be 
their  spokesman. 

The  question  of  leadership  is  crucial.  It  bears  on  all  the  prob- 
lems of  the  labor  movement;  indeed  it  bears  on  all  problems  of 
economic  and  social  organization.    Leadership  depends  essentially 


57-§6]  LABOR  UNIONS  313 

on  the  intelligence  and  moral  qualities  of  the  workmen  themselves. 
Ignorant  and  unscrupulous  men  will  choose  bad  leaders  —  bad 
perhaps  in  that  they  are  ineffective,  bad  perhaps  in  that  they  are 
corrupt.  Yet  for  the  very  reason  that  this  factor  is  fundamental, 
little  reference  is  ordinarily  made  to  it;  partly  because  it  is  so  ob- 
vious, partly  because  measures  for  its  amelioration  are  necessarily 
slow  in  operation.  It  is  the  remedies  easiest  to  apply  and  promis- 
ing quickest  effect  that  most  readily  enlist  the  interest  of  the  ardent 
reformer.  Such  are  the  powerful  labor  union  and  the  closed  shop, 
ready  ways  of  strengthening  the  position  of  the  under  man.  Yet 
how  they  shall  work  depends  in  the  end  on  the  qualities  of  the  men 
themselves,  as  well  as  on  the  qualities  of  the  employers  with  whom 
they  deal.  The  human  element  is  not  to  be  escaped.  The  univer- 
sal organization  of  labor  in  all-embracing  unions  means  enormous 
power  in  the  hands  of  labor  leaders,  just  as  universal  combination 
of  employers  means  enormous  power  in  the  hands  of  the  busi- 
ness leaders.  Neither  alternative  is  to  be  contemplated  without 
uneasiness.  The  two  together  would  portend  an  imminent  social 
conflict.  As  will  be  pointed  out  in  later  pages,  there  are  many  who 
consider  this  conflict  inevitable  and  are  not  disposed  to  ward 
off  its  approach.  He  who  looks  forward  to  the  continuance  thru 
some  generations  of  the  main  features  of  the  existing  industrial 
organization  must  look  with  misgivings  at  any  movement  which 
leads  to  great  concentration  of  power  in  the  hands  of  men  not  se- 
lected by  the  public  and  not  responsible  to  the  community  for  the 
beneficial  exercise  of  power. 

§  6.  The  attitude  of  the  union  members  toward  the  "scab"  is 
the  inevitable  result  of  class  feeling  on  the  one  hand,  on  the  other 
of  that  same  specter  of  non-employment  which  explains  the  many 
contradictions  between  the  laborers'  point  of  view  and  the  strict 
theory  of  the  law  of  private  property  and  free  competition.  In  the 
workingman's  eyes,  the  scab  is  not  merely,  as  he  is  in  the  eyes  of  the 
law,  a  competitor  who  enters  on  a  contract  for  wages  which  another 
has  chosen  to  reject.  He  takes  another  man's  job  and  deprives 
that  other  of  work;  he  is  a  traitor  to  the  cause  of  his  class.  And 
yet,  in  the  existing  industrial  organization,  there  is  no  other  pos- 


314  PROBLEMS  OF  LABOR  [57-§6 

sible  way  of  settling  wages  than  thru  competitive  offer;  tempered 
doubtless  by  collective  bargaining  and  also  by  humanity  among 
employers,  but  fixed  in  the  end  thru  competition..  And  notwith- 
standing the  pressure  of  class  feeling  against  the  scab,  this  in  fact 
does  settle  wages.  A  demand  for  higher  wages  will  not  bring  them 
permanently,  strike  or  no  strike,  if  plenty  of  other  men  can  be  found 
who  are  willing  to  do  the  work  on  the  old  terms.  In  such  case  an 
employer's  embarrassment  in  getting  together  and  drilling  a  new 
force,  and  the  scab's  fear  of  taunts  and  a  beating,  will  enable  only 
a  temporary  victory  to  be  won. 

No  one  openly  defends  violence;  and  it  is  probably  true,  as  the 
friendly  historians  of  the  labor  movement  say,  that  it  is  usually  a 
stage  of  young  unionism,  outgrown  and  discarded  as  organization 
becomes  more  permanent  and  effective.  In  the  United  States,  at 
least,  it  has  lasted  long  in  some  occupations,  such  as  mining  and 
street  railways,  and  has  remained  (there  is  too  much  reason  to 
believe)  a  deliberate  policy.  Unfortunately,  it  is  apt  to  be  cumula- 
tive in  its  effects;  once  begun,  it  breeds  more. 

When  a  strike  occurs,  especially  if  it  be  a  sudden  one  and  in- 
temperately  led,  the  employer  makes  the  best  show  he  can  of  filling 
the  vacant  places  at  once.  There  are  always  some  floaters,  not 
desirable  or  desired  for  permanent  retention,  who  can  be  used  for  a 
while  as  stop-gaps.  There  are  almost  always,  in  addition,  some 
really  desirable  substitutes;  for  in  rapidly  growing  and  changing 
communities  a  state  of  perfect  equilibrium  is  never  reached,  and 
there  is  always  some  labor  (as  there  is  some  capital)  which  has  not 
found  its  place.  The  question  whether  a  force  of  efficient  men  can 
really  be  had  by  the  employer  at  the  old  wages  will  be  settled  only 
by  considerable  experience.  The  employer  may  find  in  the  end 
that  he  cannot  secure  and  retain  good  men.  In  the  first  stages  of 
a  struggle,  however,  the  long-run  factors  are  little  weighed.  The 
temper  of  both  sides  is  up,  and  the  employer,  tho  conscious  that  he 
is  hard  put,  makes  a  bluff.  The  workmen  then  feel  keenly  all  their 
disadvantages  in  bargaining.  They  cannot  wait,  especially  if  their 
reserve  funds  are  scant.  The  tactical  move  of  the  employer  in 
filling  the  places  with  any  one  that  comes  along  is  met  by  the  tac- 


-tj.U 


u 
57-§7]  '/  '-^      LABOR  UNIONS  315 


ticaI,inove  of  violence  against  the  hated  competitor.  If  the  work 
is  carried  on  in  the  open  and  by  scattered  laborers  —  as  in  the  case 
of  teaming  or  railways  —  the  likelihood  and  the  effect  of  violence 
are  so  much  greater.  Then  develops  the  curious  phenomenon  of 
the  professional  strike-breaker  —  the  dare-devil,  very  likely  dis- 
reputable in  character,  who  for  a  bonus  will  risk  limb  and  life  in  the 
first  clash  with  the  angry  strikers.  The  mere  presence  of  such  a 
person  then  tempts  to  violence  so  much  the  more.  Worse  begets 
worse,  and  a  state  of  something  like  civil  war  is  threatened. 

T^he  "tie-up"  is  analogous  to  violence  and  often  accompanied 
byTtTespeciaTIy  where  an  industry  of  pressing  importance  to  the 
public  is  affected,  as  a  railway  or  street  railway.  The  sudden  ces- 
sation of  work,  and  the  more  or  less  disguised  threat  of  brutality 
against  any  who  would  replace  the  strikers,  amount  to  seizing  so- 
ciety by  the  throat  and  calling  on  it  to  stand  and  deliver.  Yet  the 
tactical  weakness  of  the  laborers,  especially  as  regards  the  unskilled 
or  little  skilled  among  them,  and  the  not  infrequent  callousness  of 
the  managers  of  the  industries,  lead  too  easily  to  such  a  policy. 
The  tie-ups,  indefensible  as  they  have  been  in  themselves,  have 
sometimes  been  the  only  means  of  forcing  a  hearing.  They  have 
bred  in  the  managing  class  a  wholesome  desire  to  conciliate  their 
employees, 

§  7.  The  present  halfway  stage  in  unionism  is  not  likely  to  per- 
sist indefinitely.  The  movement  will  probably  grow,  and  a  larger 
and  larger  proportion  of  hired  laborers  will  be  organized  in  militant 
associations.  So  far  as  concerns  the  unskilled  and  little  skilled, 
this  development  is  to  be  welcomed.  They  most  need  to  be  safe- 
guarded against  overreaching,  and  they  most  need  the  training  in 
common  action  and  in  subordination  to  a  common  end.  Turbulent 
and  badly  officered  tho  their  unions  often  are,  the  organization  of 
the  men  (and  women)  makes  for  social  betterment. 

As  for  the  minority  of  skilled  workmen,  the  movement  has  so 
much  that  is  narrow  and  selfish  as  to  command  less  unqualified 
sympathy.  The  sober-minded  well-wisher,  glad  to  see  the  ends  of 
the  unionists  attained  —  higher  wages,  shorter  hours,  restriction 
of  the  labor  of  women  and  children  —  would  have  them  reached  in 


316  TROBLEMS  OF  LABOR  [57-§7 

ways  which  would  benefit  all  workers,  not  a  particular  knot  only. 
Perhaps  no  better  illustration  of  the  difference  in  attitude  can  be 
found  than  with  regard  to  the  demand  for  the  same  rates  of  wages 
for  men  and  women  —  "equal  pay  for  equal  work."  ^  So  far  as 
this  means  that  the  artificial  barriers  in  women's  way  are  to  be 
removed,  and  that  they  are  to  have  equal  opportunities,  it  is  en- 
titled to  full  support.  Its  advocacy  by  the  men  organized  in  unions 
often  means,  however,  not  that  they  wish  the  women  to  be  em- 
ployed at  the  same  wages,  but  that  the  women  are  to  be  employed 
as  little  as  possible;  since,  on  the  whole,  they  are  less  efficient,  and 
therefore,  at  the  same  rates,  men  will  be  preferred.  What  the  men 
really  want  is  a  limitation  of  the  employment  to  themselves.  So  it 
is  as  regards  restrictions  on  the  labor  of  women  and  children.  With 
reference  to  both  classes,  restrictions  are  desirable  on  large  grounds 
of  social  policy.  But  the  men  who  demand  them  often  have  a 
thinly  disguised  aim  to  seciu-e  more  employment  of  their  own. 
By  no  means  all  labor  unions  or  all  labor  leaders  are  open  to  this 
criticism.  Still  less  are  they  consciously  selfish.  Like  all  men, 
they  are  apt  to  believe  that  what  is  for  their  own  advantage  is  for 
the  common  good  also.  The  fact  remains  that  the  compact  and 
well-organized  unions  of  the  skilled  workmen  are  entitled,  whether 
in  their  acts  or  in  their  professions,  to  but  a  divided  allegiance 
from  the  social  reformer. 

The  union  movement  now  commands,  more  than  any  other,  the 
fervid  support  of  the  hired  laborers.  It  is  true  that  by  no  means 
a  majority  of  such  laborers  are  now  members  of  unions.  But  they 
wish  to  be,  or  are  disposed  to  be.  The  union  policy  and  program 
have  the  sympathy  of  the  overwhelming  majority.  The  move- 
ment will  almost  certainly  grow  to  greater  dimensions  than  it  now 
has,  and  will  enroll  among  its  adherents  a  much  larger  proportion 
of  the  laborers.  And  this,  to  repeat,  is  to  be  welcomed,  notwith- 
standing all  the  drawbacks  and  dangers.  On  the  whole,  unions  are 
the  most  effective  instruments  to  which  the  laborers  can  themselves 
turn  for  bettering  their  own  condition.  They  are  a  potent  means, 
almost  an  indispensable  one,  for  securing  to  them  a  "fair"  share  in 

1  Compare  what  is  Baid  in  Chapter  47,  §  9. 


57-§7]  LABOR  UNIONS  317 

the  national  dividend,  and  for  preventing  the  inequaUties  in  wealth 
from  being  cumulative  inrtheir^effetrte 

Perhaps  the  greatest  drawback  to  the  movement  is  that  the  un- 
questionable gains  which  organization  can  bring  to  laborers  lead 
them  to  overlook  the  source  from  which  alone  can  come  a  large  and 
permanent  advance  in  wages.  The  fact  that  the  immediate  con- 
tentions always  relate  to  a  particular  rate  of  wages  and  a  particular 
set  of  laborers  leads  them  to  think  primarily  and  almost  exclusively 
of  the  means  for  bettering  the  chances  of  that  one  group ;  and  this 
always  suggests  restriction  and  limitation.  They  are  naturally 
led  to  think  and  say  that  higher  returns  for  everybody  can  be  se- 
cured thru  limitation  of  output  and  restriction  of  competition. 
Workmen  and  employers  alike  think  of  their  special  interests  alone, 
and  of  the  ways  in  which  higher  wages  or  higher  profits  can  be  got 
in  their  own  corner  of  the  industrial  field.  The  basis  for  a  real 
gain  to  all  the  community  and  all  the  laborers  is  in  a  general  ad- 
vance in  productive  efficiency,  bringing  a  greater  quantity  of  tangi- 
ble output.  This  is  most  likely  to  be  secured  by  full  competition 
among  both  capitalists  and  laborers.  Effective  organization, 
especially  if  it  be  organization  in  open  unions  among  laborers,  is 
not  inconsistent  with  free  movement  and  bracing  competition. 
None  the  less,  it  tends  to  deaden  individual  activity  and  efficiency, 
and  to  cause  gain  to  be  sought  not  thru  increasing  the  output, 
but  thru  maneuvering  for  a  greater  slice  of  the  output.  It  is 
only  with  reluctance  that  laborers  and  their  leaders  accept  labor- 
saving  devices  as  part  of  the  inevitable;  they  never  welcome 
them,  still  less  promote  them. 


CHAPTER  58 
Labor  Legislation  and  Labor  Hours 

Section  1.  Labor  legislation,  like  labor  organization,  aims  to  standardize 
conditions  of  employment.  Legislation  on  the  hours  of  labor  for  women 
and  children  the  typical  case.  Other  sorts  of  restriction.  Situation  in 
the  United  States,  318  —  Sec.  2.  Why  legislation  must  supplement 
and  support  the  laborers'  own  efforts.  A  great  moving  force  behind  it  is 
the  growth  of  altruism,  322  —  Sec.  3.  Limitation  of  hours  for  men  com- 
paratively rare.  Are  there  grounds  on  principle  for  confining  such 
legislation  to  women  and  children?  Constitutional  questions  in  the 
United  States,  324  —  Sec.  4.  The  demand  for  an  eight-hour  day  deserves 
support.  Introduced  suddenly  and  universally,  the  eight-hour  day 
would  mean  a  decline  in  product  and  in  wages;  introduced  gradually,  and 
'pari  passu  with  improvements  in  production,  it  brings  unmixed  gain,  326 
—  Sec.  5.  Minimum  wages  introduce  no  new  principle,  but  present  the 
problem  how  to  deal  with  the  unemployable,  330. 

§  1.  Any  established  rate  of  wages  or  other  part  of  the  labor 
contract  is  in  constant  danger  of  being  cut  down  by  grasping  or 
hard-pressed  employers;  for  the  bargaining  weakness  of  the  laborers 
makes  it  easiest  to  turn  to  this  way  of  saving  expenses.  Hence 
arises  the  constant  effort  of  trade  unions  to  secure  the  standardiza- 
tion of  the  conditions  of  employment  —  minimum  wages,  fixed 
hours, -settledxules.  The  same  sort  of  standardization  is  aimed  at 
in  labor  legislation.  The  plane  of  competition  is  made  by  law  the 
same  for  all.  Not  only  is  it  made  the  same,  but  it  is  intentionally 
raised.  The  enlarging  moral  sense  of  the  community  insists  that 
all  employers  shall  carry  on  their  competitive  operations  on  a  higher 
and  more  humane  level. 

The  typical  phase  of  labor  legislation  is  that  for  the  restriction 
of  the  employment  of  women  and  children.  The  perfecting  of  ma- 
chinery and  of  automatic  devices  has  made  it  possible  to  employ 
persons  of  slender  physical  strength  in  the  most  varied  sorts  of  in- 
dustries.    All  that  needs  to  be  done  is  to  pull  a  lever,  stop  or  start 

318 


58-§l]       LABOR  LEGISLATION  AND  LABOR  HOURS  319 

a  machine,  tie  a  thread.  Wherever  there  are  employers  who  see  a 
profit  in  the  conduct  of  machine  operations  with  cheap  labor,  and 
a  laboring  class  whose  members  are  willing  that  their  women  and 
children  should  work  in  the  factories,  shocking  conditions  will  de- 
velop. Children  of  tender  age  —  but  10,  9,  8  years  old  —  are  put 
to  work  in  the  mills,  for  stretches  of  11,  12,  sometimes  13  or  14, 
hours  a  day.  They  are  employed  on  night  shifts  as  well  as  day 
shifts.  Women  are  employed  not  only  for  the  same  long  hours 
and  for  night  work,  but  on  coarse  and  heavy  work  that  brutal- 
izes as  well  as  exhausts  them.  Lamentable  conditions  of  this  sort 
appeared  in  Great  Britain  in  the  early  years  of  the  nineteenth  cen- 
tury, as  the  machine  processes  made  their  way;  and  they  have  ap- 
peared in  most  countries  with  the  spread  of  those  processes  —  in 
Germany,  Austria,  France,  Italy,  Russia.  Where  a  self-respecting 
population  has  refused  to  submit  its  women  and  children  to  such 
degradation,  the  processes  and  the  methods  of  employment  have 
been  more  or  less  modified,  as  in  the  United  States  in  our  earlier 
days;  or  the  industries  using  them  have  failed  to  take  root,  as  in  the 
Scandinavian  countries.  The  great  inflow  of  immigrants  to  the 
L^nited  States  during  the  last  half  century  from  countries  of  low 
standards  has  so  altered  social  conditions  that  the  evils  of  children's 
and  women's  labor  have  begun  to  appear  here  also  with  little  miti- 
gation, in  textile  mills,  in  mines,  in  glass  works. 

Thejnachine_ process  and  the  factory  system. are  not  the  causes 
of  these  evils;  rather,  they  simply  take  advantage  of  conditions 
which  they  find.  The  fundamental  causes  are  poverty,  pressure 
for  emplojonent,  and  a  low  standard  of  living.  In  Great  Britain 
the  factory  system  in  its  early  days  found  ready  for  its  use  a  mass 
of  people  demoralized  by  a  bad  poor  law,  weakened  by  a  long  period 
of  food  scarcity,  cut  off  from  the  land  by  a  feudal  system  of  land 
ownership.  In  most  countries  of  Continental  Europe  there  are 
similar  low-lying  human  strata.  Among  these  the  factory  plants 
itself.  But  the  modern  system  of  production,  tho  it  does  not  create 
the  evils,  concentrates  them  and  makes  them  more  serious ;  and  no 
doubt  it  increases  them,  by  giving  added  opportunities.  The  very 
fact  of  concentration,  on  the  other  hand,  makes  it  more  easv  to 


320  PROBLEMS  OF  LABOR  [58- §  1] 

bring  remedial  forces  to  bear,  such  as  factory  legislation,  compul- 
sory schooling,  labor  organization.  It  is  probable  that  in  many 
cases  the  factory  system,  even  in  its  first  stages,  made  things  no 
worse  for  the  employees;  while  in  the  end  it  made  possible  a  clear 
betterment. 

It  is  not  within  the  scope  of  this  book  to  consider  the  details  of 
labor  legislation.  The  first  Factory  Act  came  in  England  in  1802; 
the  conditions  which  it  still  permitted  show  how  bad  were  those 
which  it  aimed  to  bring  to  an  end.  It  forbade  the  employment  of 
children  under  nine  years  of  age  as  "apprentices"  in  cotton  facto- 
ries, restricted  their  time  of  labor  to  twelve  actual  working  hours 
per  day,  and  prohibited  night  work.  This  was  the  beginning  of  a 
long  series  of  enactments  extending  to  our  own  day.  The  Ten- 
Hour  Act  of  1847  was  perhaps  the  most  important,  restrictirig"the 
hours  of  labor  for  women  and  young  persons  (13  to  18  years  old)  to 
10  hours  a  day,  or,  as  it  was  afterward  rearranged,  to  10^^  hours  on 
week  days,  and  5  hours  on  Saturdays.  The  Half-Time  Act  of  1844 
was  perhaps  not  less  important;  it  provided  that  children  (under  13 
years  —  by  later  legislation  defined  as  under  14)  should  work  but 
half  the  time,  either  full  time  on  alternate  days  or  half  time  on  each 
day,  and  that  the  remaining  half  should  be  given  to  school  at- 
tendance. In  the  United  States,  where  legislation  on  this  subject  is 
outside  the  constitutional  powers  of  the  federal  government,  the 
"most  important  single  state  act  —  because  of  its  influence  as  an 
example  and  a  model  —  has  been  that  of  Massachusetts  in  1874,  / 
limiting  the  hours  of  work  to  ten  for  women  and  children.  Both 
in  Great  Britain  and  in  the  United  States  the  limitation  of  hours 
for  women  and  children  has  served  in  effect  to  limit  those  for  men 
also;  directly  in  those  industries  where  the  men  are  employed  with 
the  women  and  children,  and  indirectly  thru  the  influence  of  com- 
parison and  tradition. 

Restriction  of  hours  has  been  by  no  means  the  only  form  of  legis- 
lation dealing  with  the  terms  on  which  labor  may  be  employed  or 
the  mode  in  which  industry  may  be  conducted.  Gradually  a  com- 
plete code  has  grown  up  in  the  advanced  countries,  regulating  con- 
ditions of  employment  in  all  sorts  of  ways.     Dangerous  machinery 


58-§l]      LABOR  LEGISLATION  AND   LABOR  HOURS  321 

must  be  fenced;  mines  must  be  ventilated,  lighted,  provided  with 
appropriate  safeguards;  sanitation  and  ventilation  must  be  pro- 
vided in  factories.  Industries  threatening  to  health  are  specially 
regulated.  Thus  the  manufacture,  importation,  or  sale,  of  matches 
made  with  white  phosphorus  (which  renders  the  workers  liable  to 
a  kind  of  necrosis)  is  now  prohibited  in  all  civilized  countries.  As 
Great  Britain  was  historically  the  first  country  to  enter  on  labor 
legislation,  so  she  has  remained  foremost  in  extending  and  enforcing 
it.  The.  F§£tory  and_ Workshop  Act  of  1901,  a  tj^jical  and  in  many  , 
ways  a  model  code,  not  only  affects  such  matters  as  have  been  re- 
ferred to,  but  many  others  also  —  the  hours  when  work  is  to  begin 
and  cease,  pauses  and  rests,  overtime,  the  dates  and  places  of  wages 
payment  (the  payment  of  wages  in  dramshops,  for  example,  is  for- 
bidden), the  employer's  power  to  impose  fines  for  negligence  or 
damage,  the  mode  in  which  piecework  shall  be  computed  (rates  in 
writing  must  be  posted),  and  so  on  thru  a  great  mass  of  detail.  In 
the  L^nited  States,  the  laws  of  the  several  states  vary  greatly;  many 
of  them  are  lax;  often  they  are  ill-enforced,  whether  lax  or  stringent. 
The  backwardness  of  this  country  in  labor  legislation  and  in  its  ad- 
ministration is  due  partly  to  the  laissez-faire  traditions  of  former 
days,  but  even  more  to  the  fact  that  grave  evils  are  of  compara- 
tively recent  date.^  The  changed  social  and  industrial  conditions 
of  the  last  generation  or  two,  the  influx  of  immigrants  and  the 
growth  of  manufactures,  have  rapidly  thrust  labor  problems  on  us 
in  a  new  form;  and  they  have  not  yet  been  adequately  faced.  -The—,- 
jealousy  between  different  states,  and  the  fear  in  each  state  of  ham- 
mering its  industries  in  the  competition  with  other  states,  are  serious 
obstacles  to  remedial  legislation.  In  this  matter,  as  in  others,  the 
inevitable  persistence  of  particularist  jealousy  raises  the  question 
whether  the  constitutional  powers  of  the  federal  government 
should  not  be  enlarged.,.,,....,.  .. 

For  the  effectiveness  of  a  system  of  labor  legislation,  stringent 

1  It  is  true  that  hours  were  very  long  in  the  Massachusetts  cotton  mills,  for  ex- 
ample, before  the  Civil  War.  But  until  the  influx  of  the  Irish  after  1846,  there  was 
no  permanent  mill  population ;  the  employees  were  chiefly  women  who  came  to  the 
factories  for  a  year  or  two  in  order  to  accumulate  some  savings.  And  the  pace  in  the 
factory  probably  was  slower  than  in  modern  days. 


322  PROBLEMS  OF  LABOR  [58-§2 

enforcement  is  indispensable.  There  must  be  a  staff  of  inspectors, 
well  trained  and  well  supervised,  and  there  must  be  ample  provision 
for  prompt  penalties  on  delinquents.  Every  movement  for  social 
and  industrial  reform  depends  for  its  success  on  good  public  officials, 
and  the  prospects  for  success  in  any  country  are  gaged  by  the  ex- 
tent to  which  it  provides  such  officials.  In  this  respect  also,  our 
states  are  backward.  The  new  and  complicated  problems  of  mod- 
ern industry  have  come  upon  them  suddenly,  and  political  tradi- 
tions and  political  machinery  have  not  been  adjusted  for  dealing 
with  them. 

§  2.  The  question  presents  itself:  why  legislate  on  all  these 
matters?  Why  cannot  the  same  results  be  reached  thru  the  efforts 
of  the  laborers  themselves?  Why  do  they  not  refuse  to  allow 
women  and  children  to  work,  stipulate  for  fencing  machinery, 
for  ventilating  mines,  and  what  not? 

The  answer  to  such  questioning  is  in  part  obvious.  The  work- 
men simply  cannot  make  stipulations  as  to  the  mode  in  which  their 
work  shall  be  carried  on.  This  is  one  of  the  most  serious  conse- 
quences of  their  weakness  in  bargaining.  The  only  way  in  which 
pressure  could  be  brought  on  employers  toward  improving  factory 
conditions  would  be  thru  the  process  of  the  men's  quitting  the  dan- 
gerous and  unsanitary  establishments  and  seeking  employment  in 
those  better  equipped  —  a  process  of  no  avail,  where  all  are  equally 
bad.  Almost  universally  the  laborer  must  take  conditions  as  he 
finds  them.  The  only  effective  way  in  which  the  plane  of  compe- 
tition can  be  raised  is  by  the  rigid  imposition  of  the  same  terms  on 
all  employers. 

But  it  is  not  only  helplessness  that  prevents  the  workmen  from 
bestirring  themselves  in  these  matters.  The  need  of  legislation  is 
due  largely  to  their  own  ignorance  and  short-sightedness,  and  un- 
fortunately, their  indifference  also.  Ignorance  and  short-sighted- 
ness play  the  chief  part  in  preventing  them  from  concern  about  the 
dangers  of  an  occupation.  It  was  not  the  miners  who  made  the 
effort  for  compulsory  use  of  the  safety  lamp,  but  the  men  of  science 
and  the  social  reformers.  The  rank  and  file  of  men  are  singularly 
indifferent  to  danger,  or  at  least  singularly  slow  in  taking  precau- 


58-§2]       LABOR  LEGISLATION  AND  LABOR  HOLTIS  323 

tions  against  danger.  Whether  it  be  from  bravado,  or  recklessness, 
or  simply  lack  of  intelligence,  the  fact  is  that  measures  for  prevent- 
ing accidents  must  commonly  be  forced  upon  them.  So  it  is  with 
the  unhealth}^  trades.  Those  engaged  in  them  seldom  protest,  but 
risk  their  health  with  apparent  inability  to  visualize  the  inevitable 
future.  The  initiative  in  legislation  on  all  these  matters  has  come 
mainly  from  social  reformers,  men  of  science,  physicians. 

Social  reformers  have  also  been  chiefly  instrumental  in  bringing 
about  legislation  restricting  the  employment  of  women  and  chil- 
dren. The  laboring  men  (the  women  and  children  themselves 
rarely  are  able  to  make  their  misery  known  or  their  timid  wishes 
heard)  have  been  indifferent  or  stolid,  from  simple  habituation  to 
bad  conditions.  Long  hours,  unrestricted  emplo^-ment  of  women 
and  children,  foul  air  and  filth,  are  concomitants  of  a  low  standard 
of  living.  They  go  with  low  wages  and  low  intelligence,  a  high 
birth  rate  and  a  high  death  rate.  To  lift  a  population  from  these 
conditions  calls  for  strong  compulsion  from  the  outside,  not  only  on 
the  employers,  but  on  the  laborers  also.  The  parents  are  them- 
selves often  the  first  to  evade  restrictions  on  the  employment  of 
children.  Legislation  on  labor  conditions  must  therefore  be 
accompanied  by  other  measures,  above  all  by  education.  Nothing 
is  so  effective  toward  cleansing  and  purifying  such  a  social  marasm 
as  the  bracing  atmosphere  of  democracy  —  a  sense  of  equal 
rights  and  free  opportunity,  and  a  stir  of  social  ambition. 

The  moving  force  in  bringing  about  all  the  mass  of  labor  regu- 
lation and  restriction  has  been  the  great  wave  of  human  sympathy 
which  has  come  over  the  civilized  world  during  the  last  century  and 
a  half,  and  has  so  profoundly  (often  unconsciously)  influenced  the 
attitude  of  all  men  on  social  and  political  problems.  Altruism  has 
widened  in  its  scope ;  the  suffering  of  fellow  men  andof  women  and 
children  distresses  as  it  never  did  before.  Wretchedness  that  was 
accepted  as  a  matter  of  course  a  few  centuries  ago  is  now  not  to  be 
endured.  We  hear  much,  it  is  true,  of  the  preservation  of  the  race. 
Child  labor  legislation  is  likened  to  the  conservation  of  mines  and 
forests.  If  the  growth  of  children  is  stunted  by  premature  labor, 
will  not  the  stuff  of  the  nation  deteriorate?    This  appeal  to  a  half- 


^...-'•'tEe 


324  PROBLEMS  OF  LABOR  [58-§3 

selfish  motive,  to  the  pride  of  race  and  nationality,  no  doubt  has 
its  effect.  But  the  main  force  is  that  religion  of  humanity  which 
aims  to  make  life  happier  for  all.  It  needs  but  to  be  made  known 
that  there  is  abject  squalor  and  misery  or  joyless  children's  lives, 
and  an  eager  effort  is  aroused  for  betterment.  The  civilized  world 
is  not  worse  than  it  has  been;  it  is  much  better;  and  better  most  of 
all  in  this  regard,  that  all  human  suffering  hurts  to  the  quick,  and 
more  and  more  of  public  and  private  effort  is  given  to  lessening  it. 
§  3.  Limitation  of  hours  of  labor  for  men  has  stood  in  all  coun- 
tries on  a  different  footing  from  such  limitation  for  women  and 
children.  In  England  and  in  the  United  States  no  general  regula- 
tion of  the  hours  of  adult  men  has  been  undertaken.     The  men 

ave  been  left  in  the  main  to  make  their  bargains  in  this  regard  as 
best  they  could.  The  same  is  true  of  Germany.  In  some  other 
countries  of  the  Continent  a  maximum  working  day  for  adults  has 
been  fixed  by  law  for  all  manufactures,  as  in  France  and  Switzer- 
land. But  the  limit  permitted  (12  hours  in  France,  for  example, 
1 1  in  Switzerland)  has  been  so  wide  as  to  make  the  general  legisla- 
tion of  slight  consequence.  Particular  industries,  it  is  true,  have 
been  subjected  in  one  country  or  another  to  more  stringent  re- 
strictions as  to  men's  hours  of  work;  being  selected  for  special  treat- 
ment sometimes  because  unusually  bad  conditions  have  come  to 
light,  sometimes  because  the  laborers  in  them  have  succeeded  in 
bringing  effective  pressure  to  bear  on  legislators.  The  hours  in 
bakeries  have  been  regulated  in  Germany  and  in  some  American 
states.  In  France  and  Great  Britain  the  hours  of  labor  for  men  in 
coal  mines  are  now  (1920)  limited  to  seven;  and  in  some  of  our 
Western  states  (Arizona,  Coloraclo,' I^vada,  Missouri)  there  has 
been  legislation  limiting  the  hours  in  all  mines  to  eight.  But  these 
are  exceptions;  for  most  industries  there  is  no  direct  limitation  on 

e  number  of  hours  men  may  work.  By  far  the  most  important 
restriction  is  that  which  results  from  the  legislation  as  to  women 
and  children.  So  far  as  men  are  employed  in  the  same  establish- 
ments, the  hours  fixed  for  the  women  and  children  are  in  effect  fixed 
for  the  men  also,  and  indeed  are  sometimes  (as  in  France)  made 
applicable  by  law  to  the  men  in  mixed  establishments. 


58-§3]      LABOR  LEGISLATION  AND  LABOR  HOURS  325 

In  the  United  States  the  provisions  of  the  federal  constitution 
by  which  no  person  is  to  be  "  deprived  of  Hfe,  liberty,  or  property 
without  due  process  of  law,"i  and  similar  provisions  in  many  state 
constitutions,  have  been  construed  to  limit  the  powers  of  legisla- 
tures as  regards  the  regulation  of  men's  hours  of  labor.  "  Liberty  " 
has  been  construed  to  include,  among  other  things,  the  right  to 
work  on  any  terms  acceptable  to  the  individual  adult  male.  Some 
degree  of  regulation  is  indeed  permitted  under  a  vaguely  defined 
"police  power,"  whose  exercise  is  not  deemed  inconsistent  with 
liberty.  Btlt  laws  forbidding  the  employment  of  men  for  more  than 
ten  or  twelve  hours  (and  no  such  law  can  be  effective  if  the  work- 
men are  allowed  to  contract  out)  are  held  to  deprive  them  of  liberty 
to  work  as  they  may  please.  Laws  restricting  women's  and  chil- 
dren's labor  have  not  been  held  invalid,  because  these  classes  are 
supposed  to  be  amenable  to  control  under  the  police  power.  Even 
as  regards  men,  some  laws  restricting  hours  in  particular  trades, 
where  grounds  of  health  are  supposed  to  justify  an  application  of 
this  power  (as  in  bakeries  and  mines),  have  been  held  valid.  The 
general  doctrine,  under  which  men  may  not  be  deprived  of  their 
"liberty"  to  work  long  hours,  results  from  an  interpretation  of  the 
term  which  is  easily  open  to  criticism.  It  is  probable  that  the 
judges  who  thus  construed  it  were  affected,  more  or  less  con- 
sciously, by  a  general  prejudice  against  the  laborer's  demands.  In 
any  case  the  exact  definition  of  so  vague  a  principle  could  not  but 
be  difiicult.  The  questions  of  constitutional  law  are  not  within 
the  scope  of  a  book  like  the  present.  But  the  situation  brings  into 
relief  a  point  of  principle :  are  there  grounds,  apart  from  constitu- 
tional interpretation,  for  distinguishing  sharply  between  legislation 
for  men  and  legislation  for  women  and  children? 

The  only  ground  for  such  a  distinction  seems  to  be  that  it  may 
be  better  for  the  men  to  get  shorter  hours  by  their  own  efforts  than 
by  legislation.  There  are  no  tenable  objections  of  an  abstract  or 
general  sort.  The  same  social  sympathy  which  leads  to  interfer- 
ence in  behalf  of  the  women  and  children  may  lead  consistently  to 

1  This  prohibition  is  put  on  Congress  by  the  Fifth  Amendment  and  (what  is  much 
more  important)  on  the  states  by  the  Fourteenth  Amendment. 


326  PROBLEMS  OF  LABOR  [58-§4 

interference  in  behalf  of  the  men.  If  it  be  thmightintolerable  that 
women  should  work  more  than  ten  Lours,  it  may  be  thought  no  less 
intolerable  that  men  should  work  more  than  twelve,  or  eleven,  or 
ten.  The  question  is  one  of  degree,  and  of  balance  of  gain  or  loss : 
how  far  the  altruistic  impulse  can  be  given  sway  without  ultimate 
offsetting  disadvantage. 

Something  is  to  be  said  in  support  of  the  proposition  that  the 
men  gain  more  in  the  end  by  fighting  their  battles  themselves. 
There  is  a  bracing  effect  in  achieving  a  thing  for  yourself.  Labor 
orgg,nization,  labor  unions,  labor  struggles,  bring  social  gain  not 
■  only  in  their  direct  effects  on  the  terms  of  employment,  but  in  the 
jiiscipline  which  they  give.  The  ultimate  improvement  of  the  con- 
dition of  the  mass  of  mankind  depends  on  an  elevation  of  chaj^g^^r 
and  intelligence.  Tho  the  relegation  of  progress  to  self-help  is  often 
but  a  specious  means  of  blocking  reform,  it  remains  true  that  self- 
help  is  the  most  effective  kind  of  help.  On  such  grounds  the 
men  may  be  told  to  carry  on  for  themselves  the  struggle 
for  shorter  hom-s.  But  this  certainly  is  no  reason  why  the  state 
should  not  set  a  maximum,  as  it  does  in  France  —  should  not  say 
that  there  are  general  limits  within  which  the  struggle  must  be  con- 
fined. And  there  is  no  reason  at  all  for  opposing  legislation  in 
industries  where  short  hours  are  called  for  on  clear  grounds  of 
physical  welfare.  Thus,  in  Prussia,  labor  in  mines  where  the 
temperature  is  higher  than  28°  C.  (93°  Fahrenheit)  may  not  exceed 
six  hours  daily.  Such  legislation  is  analogous  to  that  which  com- 
pels the  fencing  of  dangerous  machinery,  the  proper  ventilation  of 
workshops,  the  detailed  regulation  of  poisonous  trades. 

§  4.  The  demand  for  shorter  hours,  and  especially  for  a  general 
eight-hour  day,  is  perhaps  the  most  important  item  in  the  program 
of  labor  organizations.  Apart  from  legislation  what  is  to  be  said 
of  it? 

The  same  obvious  reason  which  makes  one  sympathize  with  the 
demand  for  higher  wages  makes  one  sympathize  with  that  for 
shorter  hours.  It  means  improvement  in  the  condition  of  the  mass 
of  mankind.  And  it  means  improvement  at  a  most  important 
point.    Specialized  machinery  and  the  division  of  labor  tend, 


58-§4]      LABOR  LEGISLATION  AND  LABOR  HOURS  327 

as  wehave  seen,  to  make  labor  more  monotonous  and  irksome,  less 
attractive.  The  best  allevialion  of  this  unwelcome  but  inevitable 
tendency  is  b^shortenfng  Hoiifs  and  increasing  the  period  of  leisure 

—  leisure  for  rest,  for  play,  lor  domestic  companionship,  for  the  de- 
velopment of  higher  faculties  and  purer  pleasures.  The  cynical 
objectors  sometimes  say  that  leisure  is  in  fact  used  by  the  mass  of 
laborers  for  drunkenness  and  demoralizing  idleness.  But  in  fact 
drunkenness  is  an  accompaniment  of  long  hours,  and  of  the  things 
that  go  with  long  hours  —  low  wages,  bad  workshops,  degradation. 
It  is  true  that  with  shorter  hours  there  should  be  other  agencies  for 
betterliving:  improved  education,  libraries,  playgrounds  and 
health}^  amusements,  substitutes  for  the  dram  shop.     Shorter  hours 

—  shorter  than  are  now  traditional  —  can  be  made  to  bring  with- 
out fail  an  overwhelming  balance  of  gain  in  happiness. 

The  debatable  question  concerns  the  effect  of  shorter  hours  on 
wages.  Tlie  demand  for  them  is  invariably  combined  with  a  de- 
mand for  the  same  wages;  less  work,  or  at  least  less  hours,  but  not 
less  pay.  Are  these  combine3  demands  reconcilable?  Will  not 
shorter  hours  lessen  the  product  of  labor  —  the  source  from  which 
wages  must  come  —  and  so  bring  inevitabl}'  a  lowering  of  wages? 

Shorter  hours  do  not  necessarilv  lessen  the  output.  Where  work 
is  done  by  the  piece,  men  may  often  accomplish  as  much  in  eight 
hours  as  in  ten.  Even  where  work  is  done  not  by  the  piece,  but  b}' 
the  day  or  hour,  this  is  often  feasible;  tho  such  an  outcome  is  not 
probable  in  the  absence  of  the  stimulus  which  piecework  gives, 
since  the  rooted  disposition  to  make  employment  then  operates 
without  check.  Even  where  machinery  sets  the  pace,  a  reduction 
in  hours  may  be  offset  by  a  gain  in  efficiency.  INIachinery  never 
fixes  the  pace  quite  without  regard  to  the  intelligence  and  watch- 
fulness of  those  who  set  it  in  motion.  An  alert  and  wide-awake 
laboring  force  may  turn  out  as  much  in  eight  hours  as  a  weary  one 
in  ten  or  twelve. 

But  all  this  holds  good  only  within  comparatively  narrow  limits. 
Pieceworkers  and  skilled  mechanics  can  usually  do  as  much  in  eight 
hours  as  in  ten;  but  they  cannot  do  as  much  in  six.  Factory  opera- 
tives can  often  do  as  much  in  ten  hours  as  in  twelve,  and  not  infre- 


328  PROBLEMS  OF  LABOR  [58-§4 

quently  they  can  do  as  much  in  eight  as  in  ten.  It  is  not  easy  to 
say  whether  a  universal  Hmitation  to  eight  hours  a  day  in  manu- 
facturing, mechanical  and  mercantile  occupations  would  lessen  the 
national  dividend.  But  —  other  things  being  unchanged  —  a  re- 
duction to  seven  or  six  could  not  fail  to  bring  that  result. 

Other  things  unchanged :  but  other  things  may  change.  Above 
all,  the  progress  of  invention  and  of  the  arts  may  increase  the  gen- 
eral efficiency  of  labor,  and  so  enable  hours  to  be  reduced  without 
lessening  the  output.  This  is  what  has  happened  in  the  civilized 
world  during  the  last  half  century;  this  is  what  we  may  confidently 
expect  in  the  years  to  come.  The  tendency  in  all  civilized  coun- 
tries has  been  to  reduce  working  time.  Factory  hours  in  England 
and  in  the  United  States  were  11  or  12  (more  commonly  12)  until 
the  middle  of  the  nineteenth  century ;  they  are  now  usually  10  iir"N 
both  countries,  with  a  half  holiday  on  Saturday  in  England.  Un- 
fortunately, there  are  many  industries  in  the  United  States  in  which 
the  hours  now  are  more  than  10,  as  in  the  textile  mills  of  the  South 
and  the  iron  and  steel  industries  of  Pennsylvania;  a  result  due  to 
the  same  cause  which  has  led  to  the  abuses  of  women's  and  chil- 
dren's labor  in  these  regions  —  a  laboring  class  with  a  low  standard 
'of  living.  In  Germany  the  usual  hours  were  12,  13,  14,  even  15, 
until  after  the  middle  of  the  nineteenth  century.  By  the  close  o? 
the  century  they  were,  for  the  majority  of  workmen,  as  low  as  ten, 
and  in  few  cases  are  more  than  eleven.  This  general  reduction  in 
hours,  pari  passu  with  a  general  advance  in  wages,  has  been  due  to 
the  gain  in  productive  capacity.  John  Stuart  Mill,  in  a  much 
quoted  passage  written  in  the  middle  of  the  nineteenth  cen- 
tury, declared  that  it  was  doubtful  whether  all  the  inventions  had 
diminished  the  toil  of  a  single  human  being.  That  douM;  can  no 
longer  be  expressed ;  happily  it  is  clear  that  for  multitudesv^f  men 
and  women  toil  has  been  diminished. 

And  it  will  be  diminished  more  and  ought  to  be  diminished  more. 
With  the  general  increase  in  the  productivity  of  labor,  the  work- 
ing people  have  a  choice  between  several  alternatives:  higher 
wages  with  the  same  hours;  lower  wages  with  less  hours;  or  a  middle 
course  —  somewhat  higher  wages  and  yet  somewhat  lower  hours. 


58-§41      LABOR  LEGISLATION  AND  LABOR  HOURS  329 

This  middle  course  is  the  one  which  they  have  chosen.  "  Chosen  " 
is  a  misleading  word ;  for  obviously  there  has  been  no  conscious  or 
deliberate  choice.  There  has  been  simply  a  vaguely  guided  steady 
pressure  for  the  better  conditions  —  for  both  higher  wages  and 
shorter  hours.  The  successful  attainment  of  both  has  been  due  to 
continued  struggle  and  continued  compromise,  and  at  bottom  to 
those  very  labor-saving  devices  which  the  laborers  themselves  view 
with  apprehension.  The  gain  has  come  by  slight  successive  steps, 
as  almost  all  industrial  changes  do  —  first  in  one  trade,  then  an- 
other, first  in  one  country,  then  another.  The  skilled  mechanics  get 
short  hours  first,  for  the  same  reason  that  they  get  higher  wages 
first  —  because  the  demand  of  the  rest  of  the  community  for  this 
sort  of  labor  is  high  as  compared  with  the  available  supply  of  it. 
The  fact  that  one  group  of  laborers,  thus  favorably  situated,  can 
secure  both  short  hours  and  high  wages,  does  not  prove  that  all  can 
do  the  same;  but  none  the  less  it  is  true  that  this  aristocracy  among 
the  laborers  has  been  able  to  wrest  its  advantages  because  there 
have  been  improvements  both  in  the  ways  of  doing  their  special 
work  and  in  those  of  doing  the  work  of  almost  all  other  laborers. 
When  once  the  general  level  of  wages  has  got  above  the  minimum 
for  mere  subsistence  and  physical  efficiency,  a  diminution  of  the 
hom-s  of  labor,  as  has  already  been  said,  is  the  best  form  of  higher 
wages.  It  makes  not  only  for  some  leisure  and  some  enjoj^ment 
of  life,  but  for  better  intelligence  and  better  character.  The  de- 
mand for  a  universal  short-hour  day  is  entitled  to  all  sympathy  and 
support.  It  is  a  goal  which  the  laborers  are  right  in  keeping  ever 
before  them  and  in  pressing  for  whenever  favorable  conditions 
exist.  No  doubt  here,  as  in  so  many  cases,  they  that  have  find  it 
easiest  to  secure  more.  The  skilled  mechanics,  whose  wages  are 
already  high,  get  the  shorter  day  soonest,  and  without  any  reduc- 
tion in  pay.  Those  industries  in  which  operations  are  continuous 
night  and  day  —  as  iron  and  steel  works  —  and  in  which  the 
twenty-four  hours  are  often  divided  between  two  shifts  working 
twelve  hours  each,  need  the  shorter  work  period  most  of  all.  The 
least  that  can  be  here  regarded  as  decent  is  a  system  of  three  shifts, 
each  working  eight  hours;  an  arrangement  common  in  the  mines  of 


330  PROBLEMS  OF  LABOR  [58-§5 

our  West,  and  to  be  wished  for  in  all  industries  working  continu- 
ously. The  favored  mechanics,  selfish  and  even  obstructive  to  true 
progress  as  they  sometimes  are,  in  this  case  at  least  set  a  good  pace 
and  offer  a  stimulating  example  to  the  rest.  .,   .  ^.,.     --     ^ 

§  5.  Where  there  are  very  low  earnings  and  the  conditions  that 
usually  accompany  low  earnings,  such  as  long  hours,  bad  work- 
rooms, harsh  bargaining  with  the  weak,  the  question  arises  whether 
there  may  not  be  a  regulation  of  the  plane  of  competition  by  fixing 
minimum  wages  as  well  as  by  regulating  hours  of  labor  and  the 
other  terms  of  employment. 

The  demand  for  this  further  form  of  labor  legislation  Is  pressed 
more  especially  for  the  so-called  "sweated"  trades.  That  term 
is  loosely  used,  and  has  come  of  late  to  have  a  wider  meaning  than 
when  first  applied.  Originally  it  described  a  system  of  subcon- 
tract and  domestic  industry,  work  being  parcelled  out  on  piece 
terms  and  done  at  the  home  of  the  workers.  The  making  of  cloth- 
ing was  long  the  tj-pical  industry.  Machinery  and  large-scale  pro- 
duction in  great  establishments,  which  have  so  completely  revo- 
lutionized the  making  of  textile  fabrics,  were  not  easily  applied  to 
the  cutting  and  sewing  of  garments.  The  wholesale  dealers  and 
the  tailors  parcelled  out  these  tasks,  especially  that  of  sewing,  to 
subcontractors,  and  these  in  turn  parcelled  them  among  men, 
women,  and  children  who  did  the  work  at  their  homes.  The 
most  striking  instance  in  the  United  States  was  in  the  East  Side  of 
the  city  of  New  York^  where  hundreds  of  thousands  of  newly  ar- 
rived immigrants,  largely  Russian  Jews,  were  engaged  by  subcon- 
tractors in  sewing  vast  quantities  of  clothing  for  the  American 
people.  The  contest  between  the  factory  and  the  handicraft,  be- 
tween the  machine  and  the  tool,  did  not  set  in  here  until  the  twen- 
tieth century.  At  the  time  when  these  lines  are  written  (1920)  it 
is  still  going  on;  subcontracting  and  sweating  remain  characteris- 
tics of  large  parts  of  the  industry. 

Wretched  conditions  often  appear  in  this  organization  of  indus- 
try; but  they  do  not  arise  from  it  by  necessity.     The  earnings  of 
^,^,^^he  so-called  sweated  are  by  no  means  universally  low.     They  are 
so  when  very  many  compete  for  the  work  and  can  turn  to  no  other 


58-§5]      LABOR  LEGISLATION  AND  LABOR  HOURS  331 

sort  of  work.  Such  is  the  situation  in  some  parts  (tho  not  in  all)  of 
the  New  York  clothing  trade;  since  the  hordes  of  newly  arrived  im- 
migrants are  ignorant  of  the  language  and  of  the  country's  possi- 
bilities, find  their  compatriots  doing  this  thing,  easily  join 
them  at  it,  and  can  turn  to  nothing  else.  The  subcontractor  may 
then  be  what  he  is  pictured  in  popular  imagination  —  a  prosperous 
and  unscrupulous  person  who  takes  advantage  of  the  helplessness 
of  the  sweated  and  grinds  them  to  long  hours  and  pitiful  wages. 
But  quite  as  often  he  is  himself  a  poor  devil,  competing  with  others  4^^ 
no  less  poor,  and  unable  to  extricate  himself  or  his  employees  (if 
such  they  can  be  called)  from  the  system. 

WTiether  in  factories  or  in  domestic  work,  there  will  be  low  wages  ^'^^ 
wherever  there  is  a  low-lying  non-corapetin^  £?HliP'  ^^^  ^^^^  therg, 
will  also  Be  Tongliours,  unsanitary  conditions,  overreaching  of  the    JUj 
weak  and  ignorant.     People  have  come  to  speak  of  "sweating"    .^"v^ 
wherever  there  are  these  lamentable  conditions.     And  in  all  such     ^r^ 
cases  the  question  presents  itself,  how  far  shall  the  competitive  pro- 
cess be  allowed  to  work  out  its  results?    May  not  the  law  set  a 
minimum  of  wages  below  which  no  one  shall  employ  or  be  em- 
ployed"?   Shall  it  not  be  required  that  every  one  who  works  is  to 
receive  at  least  a  "living  wage"? 

There  is  much  haziness  in  the  talk  about  a  "living"  wage. 
Those  who  use  the  phrase  do  not  mean  by  it  an  absolute  physical 
minimum.  They  have  in  mind  a  standard  of  fit  or  decent  living; 
and  such  standards  vary  from  age  to  age  and  from  country  to  coun- 
try. \^^lat  is  regarded  as  a  living  wage  in  the  United  States  is 
more  than  what  would  be  so  regarded  in  Germany  or  Italy.  Like 
standards  of  "just"  wages,  this  is  in  reality  something  to  which 
men  have  become  habituated  and  which  reflects  the  general  attain- 
ment of  a  given  stage  of  well-being.     The  feeling  that  none  should 

fall  j^^g^suchj/^ving  "  wage  rests  on  tbjs  samejbasis^as  most  pfto- 
ple's  feelings  in  favor  of  social  reform  —  a  sympathetic  wish  that 
all  should  share  in  the  gains  from  progress  within  the  bounds  that 
have  become  accepted  and  familiar. 

^"'The  demand  for  legislation  establishing  a  minimum  rate  of  re- 
mimeration  does  not  necessarily  involve  questions  of  principle  dif- 


332  PROBLEMS  OF  LABOR  [5S-§5 

ferent  from  those  considered  in  the  preceding  sections;  and  yet,  if 
pushed  to  its  farthest  consequences,  it  might  easily  raise  a  new 
question. 

As  with  legislation  on  hours,  factory  conditions,  and  the  like,  a 
compulsory  minimum  wages  rate  might  serve  simply  to  regulate 
the  plane  of  competition.  All  employers  would  be  affected  alike; 
no  one  could  undersell  the  others  by  cutting  below  the  es- 
tablished rate.  There  would  be  obvious  difficulties  of  admin- 
istration —  attempts  at  evasion,  to  be  met  only  by  a  staff  of 
inspectors,  by  publicity,  by  support  from  public  opinion.  Such 
difficulties,  serious  anywhere,  would  be  especially  serious  in  a 
country  like  the  United  States,  whose  methods  of  legislation  and 
administration  are  still  crude.  But  they  involve  no  new  ques- 
tions of  principle. 

A  more  fundamental  question,  yet  still  not  of  an  essentially 
novel  sort,  would  be  how  to  deal  with  the  unemployable.  There 
would  unfailingly  be  a  certain  number  not  capable  of  earning  the 
minimum  —  the  aged,  feeble,  maimed,  the  dissolute  or  half  dis- 
solute. It  would  be  impossible  to  compel  employers  to  pay  the 
minimum  to  those  whose  services  were  not  worth  it.  It  is  a  fair 
question  whether  it  is  not  a  merit  in  the  proposal,  rather  than  a  de- 
fect, that  the  community  would  be  compelled  to  face  squarely  the 
problems  of  decrepitude  and  degeneration.  Among  those  who  are 
incapable  of  work  or  but  half  capable  of  it,  two  classes  may  be  dis- 
tinguished :  those  who  are  helpless  from  causes  irremediable  for  the 
individual,  yet  not  cumulative  as  regards  society,  such  as  old  age, 
infirmity,  disabling  accident;  and  those  helpless  from  causes  that 
tend  to  be  cumulative,  such  as  congenital  feebleness  of  body  and 
character,  alcoholism,  dissolute  living.  The  first  class  may  be  dealt 
with  charitably  or  provided  for  by  some  system  of  insurance.  The 
second  class  should  be  simply  stamped  out.  Neither  the  feeble 
minded,  nor  those  saturated  by  alcohol  or  tainted  with  hereditary 
disease,  nor  the  irretrievable  criminals  and  tramps,  should  be  al- 
lowed at  large,  still  less  should  be  allowed  to  breed.  We  have  not 
reached  the  stage  where  we  can  proceed  to  chloroform  them  once 
for  all;  but  at  least  they  can  be  segregated,  shut  up  in  refuges  and 


58-§5]       LABOR  LEGISLATION  AND  LABOR  HOURS  333 

asylums,  and  prevented  from  propagating  their  kind.  The  opinion 
of  civilized  mankind  is  rapidly  moving  to  the  conclusion  that  so  far 
at  least  we  may  apply  the  principle  of  eugenics  and  thus  dispose  of 
what  is  the  simplest  phase  of  the  problem  of  the  unemployable. 

There  is  another  aspect  of  this  problem  —  one  which  does  in- 
volve a  new  principle.  What  are  the  possibilities  of  employing  at 
the  prescribed  wages  all  the  healthy  able-bodied  who  apply?  The 
pefs^oiTs'  affected  by  such  legislation  would  be  those  in  the  lowest 
economic  group.  The  wages  at  which  they  can  find  employment 
depend  on  the  prices  at  which  their  product  will  sell  in  the  market ; 
or  in  the  technical  language  of  modern  economics,  on  the  marginal 
utility  of  their  services. ^  All  those  whose  additional  product  would 
so  depress  prices  that  the  minimum  could  no  longer  be  paid  by  em- 
ployers would  have  to  go  without  employment.  It  might  be  prac- 
ticable to  prevent  employers  from  paying  any  one  less  than  the 
minimum;  tho  the  power  of  the  law  must  be  very  strong  indeed, 
and  very  rigidly  exercised,  in  order  to  prevent  the  making  of  bar- 
gains which  are  welcome  to  both  bargainers.  In  any  case  it  would 
be  quite  impracticable  to  compel  payment  of  the  minimum  to  all 
who  applied,  irrespective  of  their  numbers. 

Back  of  this  movement,  in  other  words,  is  the  specter  of  Mal- 
thusianism.  The  danger  of  pressure  from  uncontrolled  increase  of 
numbers  exists  in  modern  societies  chiefly  for  the  lowest  stratum. 
In  the  United  States  it  needs  to  be  considered  as  regards  the  newly 
arnved  immigrants  and  their  first  descendants.2  No  legal  mini- 
mum of  wages  can  avail  if  numbers  increase  so  as  to  bring  an  ever 
growing  competition  for  employment.  How  far  this  obstacle 
would  really  stand  in  the  way  of  minimum-wage  schemes  would 
depend,  as  we  have  seen,  mainly  on  the  extent  to  which  the  stir  of 
ambition  reached  all  classes,  low  as  w^ell  as  high.  Freedom,  edu- 
cation, broadening  of  opportunity,  the  vulgar  as  well  as  the  refined 
forms  of  the  love  of  distinction  —  all  the  influences  of  democracy 
—  make  it  probable  that  increase  of  numbers  will  not  destroy  the 
possibilities  of  permanent  uplift.     Yet,  tho  we  may  have  hope  and 

1  See  Chapter  48,  §  2. 

2  Compare  Chapter  53,  §  3. 


334  PROBLEMS  OF  LABOR  [58-§5 

even  confidence  on  this  score,  we  cannot  be  sure  how  far  the  forces 
of  nature  may  be  curbed. 

Whether  this  fundamental  difficulty  will  really  present  itself 
depends  on  the  mode  in  which  minimum  wages  are  attempted  to 
be  fixed  —  whether  at  a  rate  conforming  on  the  w  hole  to  market 
wages,  or  at  a  rate  substantially  higher.  The  probabilities  are  that 
in  this  matter,  as  in  the  essentially  similar  one  of  general  compul- 
sory arbitration,!  the  divergence  from  exi*sting  conditions  will  be 
slight.  The  minimum  wages  fixed  by  law  are  likely  to  be  virtually 
in  accord  with  competitive  wages  for  the  lowest  group.  They  will 
not  modify  the  essentials  of  the  wages  scale  as  it  is;  they  will  rather 
standardize  current  rates.  They  w^ill  aim  at  wages  which  are 
"just"  and  in  accord  with  a  "minimum"  standard  of  living,  in  the 
sense  that  they  will  tend  to  aid  and  strengthen  the  forces  that  pre- 
vent weak  bargaining  and  exploitation.  Such  at  least  has  been  the 
case  in  the  much  discussed  legislation  of  the  Australian  colonies, 
especially  Victoria,  and  recently  (1909)  in  the  INIinimum  Wages 
Act  of  Great  Britain,  It  remains  to  be  seen  whether  this  move- 
ment, like  others  of  which  enthusiastic  people  speak  in  large  terms, 
will  be  carried  to  the  stage  where  it  will  encounter  obstacles  funda- 
mental in  the  system  of  private  property  and  competitive  industry. 

1  See  the  next  chapter,  Chapter  59,  §  6. 


CHAPTER  59 
Some  Agencies  for  Industrial  Peace 

Section  1 .  Profit  sharing  affects  profits  as  the  residual  element.  Some  modes 
of  applying  it.  Immediate  and  deferred  participation,  335  —  Sec.  2. 
Profit  sharing  will  not  be  widely  applied  unless  it  pays,  by  increasing 
efficiency.  Uncertain  connection  between  profits  and  workmen's  eSi- 
ciency.  Importance  of  the  employer's  personality,  339  —  Sec.  3.  Other 
methods  of  linking  employee  to  employer:  "gain  sharing"  and  "welfare" 
arrangements,  342  —  Sec.  4.  The  sliding  scale  applicable  where  product 
is  homogeneous.  Not  in  harmony  with  the  general  principle  of  employer's 
assumption  of  industrial  risks,  yet  often  helpful  toward  avoiding  friction 
and  dispute,  343  —  Sec.  5.  Arbitration,  private  and  public.  Not  applic- 
able where  such  matters  as  recognition  of  the  union  or  the  closed  shop 
are  in  dispute;  but  applicable  to  the  questions  of  wages  and  the  like. 
Private  boards  imply  trade  agreements  and  organized  unions.  Public 
boards  are  usually  boards  of  conciliation,  but  none  the  less  helpful,  344  — 
Sec.  6.  Compulsory  arbitration,  carried  to  its  logical  outcome,  means 
settlement  of  all  distribution  by  public  authority,  and  may  be  the  entering 
wedge  to  socialism.  Possibility  that  it  will  remain  indefinitely  in  a  half- 
way stage  and  not  proceed  to  this  outcome,  348. 

§  1 .  The  rapid  growth  of  the  miHtant  movement  among  laborers, 
the  increasing  tension  between  the  opposing  groups  of  employers 
and  employed,  the  losses  and  disturbances  from  strikes  and  lock- 
outs, have  set  people  to  considering  ways  of  lessening  the  causes 
of  strife.  Among  the  proposed  remedial  devices  are  profit  sharing, 
welfare  arrangements,  sliding  scales,  arbitration.  To  the  main 
features  of  these  and  to  the  principles  which  must  be  borne  in  mind 
regarding  them  we  may  now  give  attention. 

Profit  sharing  is  a  device  for  binding  together  the  employer  and 
the  employees  engaged  in  a  given  enterprise.  Trade-unionism 
looks  to  a  horizontal  division:  all  the  employees  in  a  trade,  scat- 
tered in  various  establishments,  are  to  be  united  in  common  action 
against  all  the  employers.  Profit  sharing  looks  to  a  vertical  divi- 
sion :   the  employer  and  the  employees  of  the  single  establishment 

335 


336  PROBLEMS  OF  LABOR  [59- §  1 

are  to  be  united,  working  together  for  the  common  welfare  of  their 
compact  group,  sharing  the  gains  and  perhaps  the  losses.  It  is 
conceivable  that  both  sorts  of  combination,  the  horizontal  and  the 
vertical,  should  go  on  side  by  side  —  that  the  workmen  should  be 
united  with  all  their  fellows  for  common  action  on  some  matters, 
and  with  their  several  employers  for  common  action  on  others. 
In  fact  they  usually  are  found  incompatible.  Those  employers 
who  enter  on  profit  sharing  are  averse  to  participation  by  their 
v/orkmen  in  trade  unions,  and  indeed  often  adopt  profit  sharing 
with  the  design  of  counteracting  the  union  movement.  The 
unions,  on  their  part,  are  opposed  to  profit  sharing,  or  at  the  least 
suspicious  of  it,  because  it  tends  to  make  the  workman  interested 
chiefly  in  the  welfare  of  his  immediate  fellow-employees,  not  in 
that  of  all  workmen  of  the  trade  or  locality. 

Profit  sharing  aims  to  distribute  among  the  workmen  some  part 
of  that  residual  share  in  distribution  which  ordinarily  goes  to  the 
business  man  alone.  In  the  typical  profit-sharing  scheme,  no  en- 
deavor is  made  to  modify  interest  or  ordinary  wages.  The  usual 
provision  is  that  interest  shall  be  paid  to  capital  at  the  current  rate 
(say  five  or  six  per  cent)  and  that  wages  shall  be  paid  to  the  work- 
men at  the  current  rates.  LTsually,  too,  it  is  provided  that  the  man- 
agers, even  tho  they  be  also  the  owners,  shall  be  allotted  a  stated 
sum  as  salary  —  as  wages  for  that  labor  of  management  and  su- 
perintendence which  obviously  is  part  of  current  work  of  the 
enterprise.  The  surplus  left  after  paying  all  these  shares  is  then 
to  be  divided  between  employers  and  employees.  Sometimes  half 
of  it  goes  to  the  one,  half  to  the  other,  as  in  the  well-known  case  of 
the  Briggs  collieries  in  England  (a  case  in  which  profit  sharing  was 
given  up  because  it  failed  to  prevent  strikes).  Similar  in  principle, 
but  more  favorable  to  the  workmen,  is  the  division  in  the  famous 
Leclaire  house-painting  establishment  in  Paris,  where  the  propri- 
etors get  one  quarter  of  the  net  surplus,  the  workmen  three  quar- 
ters. In  other  cases,  as  with  the  Nelson  Manufacturing  Company 
of  St.  Louis,  the  division  is  based  on  the  proportion  which  the  total 
capital  invested  bears  to  the  total  amount  paid  out  in  wages  in  the 
course  of  the  year.     In  a  French  example  no  less  noted .  than 


59-§l]  AGENCIES  FOR  INDUSTRIAL  PEACE  337 

Leclaire's,  that  of  the  Godin  metal-working  estabhshment  at  Guise, 
the  division  is  in  the  proportion  which  the  total  interest  paid  on 
capital  bears  to  the  total  amount  paid  in  wages  —  evidently  an  ar- 
rangement much  more  favorable  to  the  workmen.  Still  another 
variant  —  and  there  are  numberless  variations  in  detail  —  is  that 
the  same  dividend  shall  be  paid  on  wages  as  is  paid  on  the  stock  of 
the  enterprise  (it  being  conducted  under  corporate  organization). 
This  arrangement  has  the  advantage,  from  the  employer's  point  of 
view,  that  it  gives  no  occasion  for  any  inspection  of  the  books  by 
way  of  controlling  the  calculations  of  net  profits;  for  the  rate  of 
dividend  on  the  stock  is  a  comparatively  public  matter  in  any  case. 
In  all  cases,  however,  the  partition  among  the  individual  workmen 
is  according  to  the  wages  severally  received  by  them.  Each  one 
gets  a  share  based  on  the  proportion  which  his  wages  bear  to  the 
total  paid  out  in  wages  to  all;  so  that  those  who  are  highly  paid 
and  steadily  employed  get  the  largest  amounts  of  bonus.  Steady 
employment,  to  be  sure,  is  usually  a  condition  of  any  bonus  at  all; 
as  a  rule  those  only  who  have  been  members  of  a  permanent  staff 
are  admitted  into  the  profit-sharing  scheme. 

The  amount  which  goes  to  the  workmen  is  not  necessarily  paid 
to  them  in  cash.  A  part  of  it,  even  the  whole  of  it,  may  be  kept 
in  the  enterprise  as  working  capital,  but  credited  to  the  workmen, 
and  thereafter  entitled  to  interest  and  profits  like  other  capital  in- 
vested ;  the  interest  and  profits  being  paid  in  cash,  but  the  accumu- 
lating bonuses  retained  as  additions  to  capital.  In  the  great  Godin 
concern  no  part  of  the  workmen's  shares  in  profits  was  paid  in  cash, 
but  all  was  put  into  the  enterprise,  being  used  for  buying  shares 
in  it;  with  the  result  that  in  process  of  time  the  workmen  them- 
selves became  the  main  owners,  and  the  arrangement  became  one 
not  so  much  for  profit  sharing  as  for  cooperative  production.  The 
same  result  was  eventually  reached  in  the  Leclaire  establishment. 
There  only  part  of  the  bonus  was  paid  in  cash,  the  rest  being  turned 
over  to  a  workmen's  Mutual  Aid  Society  and  invested  in  the  enter- 
prise for  the  benefit  of  that  Society.  Indirectly,  but  none  the  less 
effectually,  the  workmen  thru  the  Aid  Society  have  become  the 
main  owners;  and  this  arrangement  too  has  become  one  for  coopera- 


338  PROBLEMS  OF  LABOR  [59- §  1 

tion.  In  the  Nelson  Company,  also,  the  workmen's  share  of  profits 
must  be  left  in  the  business;  and  the  hope  and  expectation  of 
the  head  of  the  enterprise  is  that  here  also  profit  sharing  will 
eventually  be  replaced  by  cooperation.  But  such  an  outcome,  tho 
aimed  at  in  some  of  these  conspicuous  cases,  is  no  essential  part  of 
a  profit-sharing  scheme.  Cooperation  presents  different  problems ; 
for  it  endeavors  to  get  rid  of  the  business  man,  not  simply  to 
strengthen  the  bonds  of  interest  between  him  and  his  employees.^ 
For  the  great  majority  of  workmen  the  most  effective  way  in  which 
profit  sharing  can  strengthen  those  bonds  is  to  pay  their  share  in 
cash  once  for  all;  and,  except  in  France,  this  is  the  most  common 
plan. 

Profit  sharing  has  been  practised,  and  is  practised,  on  a  consider- 
able scale  in  France.  The  habitual  thrift  of  the  French  and  their 
constant  eye  to  small  sums  make  it  more  attractive  to  many  work- 
men there  than  it  seems  to  be  in  other  countries;  and  a  few  con- 
spicuous examples  of  success,  as  in  the  enterprises  of  Leclaire  and 
Godin,  have  contributed  to  the  spread  of  the  movement.  In  other 
countries  it  has  not  had  so  much  vogue,  and  on  the  whole  cannot 
be  said  to  be  extending  in  any  noticeable  degree  or  to  promise  any 
far-reaching  influence  on  industrial  development. 

In  the  United  States  the  term  profit  sharing  is  sometimes  ap- 
plied to  an  arrangement  by  which  employees  are  enabled  —  and 
indeed  tempted  —  to  become  stockholders  in  corporations  which 
employ  them.  This  obviously  is  very  different  from  the  systems 
just  outlined.  Tho  like  them  in  that  there  is  expectation  of  enlist- 
ing the  men's  interest  in  the  general  pecuniary  outcome  of  the  en- 
terprise, it  differs  in  essential  particulars.  No  one  becomes  auto- 
matically an  interested  party.  Only  those  become  participants  who 
elect  to  put  aside  something  out  of  their  regular  earnings,  or  author- 
ize the  company  to  do  so  for  them;  and  they  are  usually  a  small 
number,  and  the  better  paid  employees  at  that.  Their  participa- 
tion, further,  is  not  in  the  total  profits,  but  only  in  that  part  which 
is  distributed  at  once  among  the  stockholders  in  dividends.  There 
are  different  forms  of  the  arrangement,  varying  as  regards  the  ex- 

1  See  below,  Chapter  61. 


59-§2]  AGENCIES  FOR  INDUSTRIAL  PEACE  339 

tent  of  the  share  in  profits  (sometimes  preferred  stock,  sometimes 
common  stock),  the  number  and  character  of  the  employees  af- 
fected, and  the  precautions  for  reserving  to  the  employers  a  firm 
control  over  the  enterprise  as  a  whole.  The  plan  is  usually  adopted, 
even  more  overtl}-  than  is  the  case  with  profit  sharing  in  the  more 
exact  sense,  for  the  purpose  of  making  the  men  conservative,  check- 
ing unrest,  " preventing  trouble."  It  is  not  often  imbued  with  any 
sincere  spirit  of  social  sympathy.  Even  less  than  profit  sharing 
has  it  a  claim  to  be  regarded  as  a  "solution"  of  social  problems. 

§  2.  Profit  sharing  was  at  one  time  proclaimed  as  a  solution  of 
the  labor  problem.  It  was  expected  to  be  widely  adopted  and  to 
bring  general  industrial  peace.  Slackened  growth  of  the  move- 
ment, and  a  more  critical  consideration  of  its  methods,  have  damp- 
ened these  expectations.  Yet  there  still  are  earnest  advocates, 
who  believe  that  it  has  large  possibilities. 

The  plan  will  not  be  widely  adopted  unless  it  pays  the  employer. 
It  is  true  that  there  are  generous-minded  employers  who  will  adopt 
such  a  system,  even  tho  it  brings  no  pecuniary  gain.     This  has  been 
the  basis  of  some  of  the  most  conspicuous  and  long-continued  cases. 
There  large  enterprises  have  been  conducted  by  men  of  strong  al- 
truism as  well  as  of  high  ability,  who  have  gathered  about  them  a 
staff  of  managers  and  workmen  imbued  with  the  same  spirit.     Un- 
fortunately this  spirit  is  rare.     Were  it  common,  the  whole  aspect 
of  the  economic  world  would  be  changed.     The  immense  majority 
of  business  men,  and  of  workmen  too,  are  not  disposed  to  hand  over 
to  others  larger  gains  unless  they  see  some  advantage  therefrom  to 
themselves.     So  far  as  profit  sharing  is  concerned,  the  advantage, 
to  be  sure,  is  not  necessarily  a  direct  pecuniary  one.     Freedom  from 
labor  trouble  and  strikes  has  come  to  be  of  indirect  but  considerable 
pecuniary  advantage.     Conceivably  there  may  be  an  advertising 
advantage;  people  will  be  led  to  make  purchases  by  preference  from 
those  w^ho  are  supposed  to  be  generous  with  their  workmen.    Some 
gain  of  a  fairly  calculable  sort  must  accrue  if  the  profit-sharing  plan 
is  to  prevail  widely. 

The  one  important  and  permanent  source  of  pecuniary  gain 
would  be  in  greater  efficiency  on  the  part  of  the  individual  work- 


340  PROBLEMS  OF  LABOR  [59-§2 

man.  Knowing  that  he  is  to  have  a  share  in  the  profits,  he  may  be 
expected  to  work  more  conscientiously  and  more  assiduously,  to 
save  materials  and  to  care  for  tools.  Thus  he  will  contribute  as 
much  in  additional  output  as  he  receives  in  bonus;  not  only  as  much 
but  perhaps  even  more;  so  that  the  employer,  after  paying  the 
bonus,  will  find  output  and  presumably  profits  increased.  That 
there  is  material  as  well  as  spiritual  waste  under  the  ordinary  wages 
system  has  already  been  pointed  out.  Any  scheme  that  really 
promised  to  eliminate  or  lessen  the  waste  would  be  welcome  from 
every  point  of  view. 

There  are  circumstances  under  which  this  welcome  result  may 
accrue.  Where  the  industry  is  considerably  and  directly  affected 
by  the  way  in  which  the  laborers  do  their  work;  where  those  labor- 
ers are  intelligent  enough  and  persistent  enough  to  keep  to  better 
ways,  even  after  the  novelty  of  the  scheme  has  worn  off;  where  the 
employer  steadily  gives  them  a  substantial  share  of  the  accruing 
gains  —  there  the  conditions  are  sufficiently  favorable  for  profit 
sharing.  Such  seems  to  have  been  the  situation  in  Leclaire's  house- 
painting  enterprise.  There  the  work  was  widely  scattered,  diflficult 
of  supervision,  and  much  affected  by  the  care  and  skill  of  the  indi- 
vidual workmen;  the  employer  was  capable  and  warm-hearted, 
earned  the  confidence  and  loyalty  of  his  men,  and  gathered  about 
him  a  staff  above  the  average  in  intelligence  and  character. 

In  most  industries  of  modern  times  the  conditions  are  not  thus 
favorable.  It  may  be  a  question  how  far  deficient  intelligence  and 
farsightedness  in  the  average  workman  would  stand  in  the  way,  if 
other  things  were  propitious;  but  other  things  are  not  propitious. 
In  the  typical  modern  enterprise,  there  is  a  very  uncertain  connec- 
tion between  the  employee's  individual  care  and  activity,  and  the 
general  outcome  of  the  business.  Tho  he  do  his  best,  profits  may 
be  wiped  out  by  a  turn  in  the  market  or  by  the  employer's  bad  man- 
agement. Conversely,  tho  he  do  the  usual  humdrum  thing,  profits 
may  be  high.  This  is  the  essential  economic  weakness  of  profit 
sharing.  The  final  outcome  in  the  way  of  profits  depends  not  only 
on  the  efficiency  of  the  individual  employees,  but  on  a  multitude  of 
other  factors.     To  this  must  be  added  the  circumstance  that  with 


59-§2]  AGENCIES  FOR  INDUSTRIAL  PEACE  341 

the  increasing  concentration  and  standardization  of  technical  opera- 
tions, it  becomes  more  and  more  easy  to  parcel  out  the  stints  and 
to  supervise  the  men.  Work  is  commonly  done  in  factories  with 
much  regularity  and  routine.  Even  when  there  is  not  piecework, 
it  is  possible  to  fix  the  normal  performance  for  each  man.  The 
power  of  discharge  is  a  more  coarse  and  cruel  stimulant  to  eflSciency 
than  a  bonus  from  eventual  profits,  but  it  is  more  direct  and  with 
most  men,  unfortunately,  more  effective. 

To  repeat,  unusual  employers  can  achieve  unusual  results.  The 
spirit  of  the  leader  permeates  a  business  enterprise,  as  it  does  a  regi- 
ment or  a  school.  Even  industries  in  which  conditions  seem  un- 
promising —  where  the  connection  between  individual  efficiency 
and  eventual  profits  is  remote  —  have  been  conducted  on  the 
profit-sharing  plan  with  brilliant  success  by  able,  inspiring,  high- 
minded  men.  The  list  of  enterprises  in  which  the  scheme  has  been 
continuously  maintained  shows  a  surprising  variety;  they  cannot 
be  said  to  have  industrial  characteristics  in  common.  The  infer- 
ence is  the  stronger  that  the  personality  of  the  leaders  has  been  the 
chief  factor.  Where  once  established,  the  system  long  maintains 
itself,  even  after  the  death  of  the  founder,  for  the  same  reason  that 
any  business  organization  continues  to  run  on  for  a  considerable 
period  when  once  it  has  got  its  impetus.  Possibly  the  founder  has 
enlisted  associates  who  are  like  himself  in  character  and  spirit. 
That  profit  sharing  will  spread  widely  is  not  to  be  inferred  from  its 
long  maintenance  in  individual  instances. 

The  other  less  immediate  gains  to  employers  from  the  plan  are 
not  of  so  great  importance  as  the  direct  effect  on  output  and  profits. 
The  prevention  of  strikes  has  been  a  strong  motive  with  some  em- 
ployers. The  fact  that  the  trade  unions  look  on  it  askance,  and 
the  growth  of  other  methods  for  linking  the  interests  of  employer 
and  employee,  have  made  it  of  diminishing  promise  on  this  score. 
Sometimes,  as  has  already  been  noted,  an  advertising  advantage  is 
supposed  to  be  secured.  A  business  concern  turning  out  an  article 
widely  used  by  the  general  public  ingratiates  itself  by  what  is  sup- 
posed to  be  kindly  and  generous  dealing  with  its  employees.  It  is  a 
most  commendable  form  of  advertising,  if  the  dealing  be  really 


342  PROBLEMS  OF  LABOR  [59-§3 

generous  and  kindly.  Unfortunately  it  is  far  less  effective  than 
the  familiar  blatant  sort. 

The  prospects  that  profit  sharing  will  be  universally  adopted  are 
nil.  Even  the  prospect  for  w  ide  spread  is  slight.  For  good  or  ill, 
the  horizontal  division  between  employers  and  employees  is  be- 
coming sharper.  The  decay  of  semi-patriarchal  conditions  and 
the  spread  of  the  labor-union  movement  make  against  close  vertical 
association.  This  does  not  mean  that  relations  are  necessarily  be- 
coming more  embittered,  or  that  industrial  peace  is  harder  to 
attain;  only  that  its  attainment  will  not  be  much  promoted  by  this 
particular  device. 

§  3.  Profit  sharing,  however,  is  only  one  way  of  reaching  the 
desired  results.  It  is,  as  we  have  seen,  not  a  very  direct  way. 
Other  devices  to  the  same  end  may  be  tried,  and  some  of  them  seem 
to  have  more  promise  of  effect  than  profit  sharing.  "Gain  shar- 
ing" is  a  generic  phrase  often  applied  to  them.  Piecework  pure 
and  simple  is  an  obvious  case.  Sundry  schemes  have  been  devised 
by  ingenious  managers :  premiums  on  output  per  man  or  per  group 
of  men;  bonuses  on  savings  of  materials,  oil,  fuel;  and  the  like. 
Simplest  and  perhaps  most  effective  of  all  is  general  good  treatment 
combined  with  general  good  discipline.  Some  tautness  of  organi- 
zation, some  threat  of  punishment  thru  discharge,  there  must  be 
so  long  as  men  are  hired  by  others  for  profit.  But  a  humane  and  far- 
sighted  policy  can  do  much  to  mitigate  the  inevitable  drawbacks. 
Prompt  payment  of  wages  at  the  going  rates,  ready  attention  to 
complaints,  straightforward  and  non-patronizing  dealing,  wise  se- 
lection and  supervision  of  the  understrappers,  well-equipped  work- 
rooms, and  good  provisions  for  comfort  —  all  these  are  helpful. 
They  are  helpful  most  of  all  when  guided  by  the  right  sort  of  per- 
sonality; for,  as  has  just  been  said,  the  personality  of  the  industrial 
leader  runs  thru  his  entire  establishment. 

What  are  called  "welfare"  arrangements  play  a  considerable 
part  in  the  large-scale  industries  of  our  day.  Such  are  schools  and 
libraries  in  connection  with  the  enterprises;  light  and  ventilation  in 
factories;  decent  places  for  the  midday  meal;  gardens,  playgrounds, 
and  club  rooms;  dwellings  (when  supplied  by  the  employer)  of  good 


59-§4]  AGENCIES  FOR  INDUSTRIAL  PEACE  343 

design  at  moderate  rentals;  pension  plans  and  mutual  aid  societies, 
aided  and  subventioned  by  the  employer;  and  so  on  indefinitely. 
All  these  are  good,  not  as  "solutions"  of  the  fundamental  problems, 
but  as  mitigations  of  existing  evils.     The  increasing  adoption  of 
methods  of  this  sort  is  in  part  but  one  manifestation  of  that  growth 
of  altruistic  feelings  which,  as  we  have  seen,  underlies  labor  legisla- 
tion and  the  whole  movement  for  social  reform.     In  no  small  de- 
gree it  is  due  also  to  pressure  from  labor  unions.     The  fact  that 
workmen  are   formidably  organized    makes  it  pay  to  minimize 
discontent.     ^Miether  due  to  humane  spirit  or  to  cold-blooded  cal- 
culation, this  mode  of  "fighting  the  unions"  may  have  oiu-  cordial 
sympathy.     If  the  competition  among  employers  and  salaried 
managers  brings  to  the  fore  those  who  are  not  only  energetic  and 
capable,  but  far-sighted  and  of  good  heart,  so  much  the  better. 
Development  in  this  direction,  at  all  events,  seems  more  likely  to 
take  place  than  that  of  profit  sharing  in  the  strict  sense,  and  it 
promises  more  for  industrial  peace  in  the  future. 

§  4.  An  entirely  different  device  is  that  of  the  sliding  scale.  By 
this,  as  by  profit  sharing,  an  automatic  sharing^oFgoodT^sults  and 
of  bad  is  sought;  but  in  a  different  way.  Wages  are  made  to  vary 
with  the  price  of  the  product,  going  up  as  the  price  rises,  declining 
as  that  falls.  A  minimum  rate,  below  which  wages  shall  in  no  case 
fall,  is  usually  set,  and  a  price  of  the  product  is  agreed  on  corre- 
sponding to  this  rate.  As  the  price  rises  above  this  point,  wages 
also  go  up,  by  stages  agreed  on  in  advance;  and  as  the  price  declines, 
wages  fall,  until  they  (perchance)  reach  the  minimum.  The 
method  is  of  course  applicable  only  where  a  homogeneous  product  is 
turned  out,  and  where  the  price  of  that  product  can  be  ascertained 
readily,  say  from  published  market  quotations. 

The  sliding  scale  seems  at  first  sight  to  be  out  of  accord  with  the 
general  methods  of  the  wages  system.  The  principle  (if  principle 
it  can  be  called)  underlying  the  usual  arrangement  is  that  the  em- 
ploying business  man  takes  the  risks  of  enterprise,  and  that  the 
employee  does  not.  The  employee  gets  once  for  all  a  stipulated 
sum,  which  is  independent  of  the  price  obtained  for  the  particular 
goods  sold,  as  it  is  independent  of  the  profits  of  the  particular  em- 


344  PROBLEMS  OF  LABOR  [59- §  5 

ployer.  If  the  product  In  the  industry  or  estabhshment  falls  in 
price,  the  employer  bears  the  brunt  of  the  loss.  The  presumable 
consequences  might  be  outlined  thus :  a  decline  in  the  profits  of  the 
employing  capitalists,  then  a  reduction  in  the  output,  then  a  trans- 
fer of  workmen  to  other  occupations,  and  an  eventual  readjustment 
to  the  price  normal  for  that  article;  thru  it  all,  no  changes  of  wages 
from  the  level  fixed  by  the  general  forces  which  determine  wages. 
This  very  statement  of  the  presumable  or  "  theoretical  "conse- 
quences of  the  usual  wages  arrangement  indicates  why  the  sliding 
scale  may  commend  itself  both  to  employers  and  to  workmen. 
These  consequences  are  conditioned  on  mobility  of  labor  and  capi- 
tal. For  considerable  periods  there  is  little  mobility;  and  those 
engaged  in  an  industry  often  think  there  is  less  than  in  fact  exists. 
When  there  are  lower  prices  and  lower  profits,  the  decline  in  output, 
tho  it  comes,  is  carried  out  slowly  and  reluctantly.  A  shift  of 
workmen  away  from  the  industry  takes  place  no  less  slowly  and  re- 
luctantly. Employers  and  employees  are  in  a  sort  of  de  facto  prod- 
uct-sharing situation.  Both  are  for  the  time  being  settled  in  the 
existing  employment,  and  between  them  can  get  out  of  it  only  so 
much  as  the  output  of  the  industry  in  gross  makes  possible.  It  is 
true  that  a  prolonged  period  of  high  prices  and  high  wages  tends  to 
attract  capital  and  labor  into  the  industry,  and  so  to  bring  again 
a  lower  range  of  returns;  while  conversely  a  period  of  low  prices 
and  low  wages  has  the  opposite  effect.  These  further  conse- 
quences, however,  are  commonly  disregarded  by  "practical"  peo- 
ple; for  they  rarely  look  beyond  the  present  and  the  very  near 
future.  Only  a  small  number  of  far-sighted  business  men  and  a  few 
economic  students  give  thought  to  eventual  results.  Most  persons 
think  of  the  laborers  and  the  employers  in  a  given  industry  as  com- 
mitted to  it  once  for  all.  Friction  may  be  avoided  and  the  continu- 
ous conduct  of  operations  promoted  if  there  is  agreement  in  advance 
that  both  wages  and  profits  shall  fluctuate,  in  some  degree  at  least, 
with  the  price  of  the  product. 

§  5.  Still  another  device  for  preventing  strife  is  arbitration. 
Why  not  refer  disputed  questions  about  wages  and  terms  of  labor 
to  an  impartial  judge,  and  abide  by  his  decision? 


o9-§5]  AGENCIES  FOR  INDUSTRIAL  PEACE  345 

Arbitration  may  be  private  or  public.  If  private,  it  may  be  spo- 
radic —  provided  for  the  particular  exigency;  or  permanent,  thru 
boards  or  judges  arranged  for  in  advance.  If  pubKc,  it  may  be 
with  powers  of  recommendation  only,  or  with  powers  of  compul- 
sion. The  most  widespread  forms  of  arbitration  are  those  pri- 
vate arrangements  which  are  permanently  established  and  those 
public  boards  whose  powers  are  for  recommendation  only.  And 
these  two,  again,  tho  different  in  origin  and  in  formal  position,  work 
in  practise  much  in  the  same  way  and  with  the  same  degree  of 
efficacy. 

Disputes  concerning  wages,  hours,  and  other  matters  very  rarely 
involve  any  large  question  of  principle,  or  any  attempt  at  far- 
reaching  disturbance  of  existing  conditions.  They  turn  on  wages 
a  few  per  cent  higher  or  lower,  hours  a  little  longer  or  shorter.  By 
"fair"  wages  most  people  mean  the  current  market  rate,  or  that 
rate  which  would  obtain  if  competition  worked  out  all  its  results 
smoothly  and  promptly.  When  emploj^ers  and  employees  dispute 
as  to  what  is  "fair,"  they  are  commonly  not  very  far  apart;  and 
commonly  each  side  would  lose  less  (certainly  for  the  immediate 
future)  by  accepting  the  terms  offered  from  the  other  side  than  by 
a  strike  or  lockout.  The  frequent  outcome  is  to  split  the  difference, 
often  no  great  difference;  and  this  is  much  eased  if  the  whole  dis- 
pute be  referred  to  an  impartial  arbitrator  or  board  of  arbitration. 

Not  only  is  there  usually  a  material  gain  to  both  sides  by  turning 
to  arbitration;  there  is  an  immense  gain  for  pride  and  temper. 
Men  who  have  backed  their  demands  by  threat  and  ultimatum  find 
it  difficult  to  retreat  to  a  halfway  position,  even  tho  they  know  that 
it  will  be  better  to  do  so.  The  existence  of  a  respected  standing 
tribunal  serves  in  industrial  conflicts  as  the  Hague  Court  of  Arbi- 
tration serves  between  nations :  it  enables  the  parties  to  withdraw 
without  loss  of  pride  from  a  bellicose  attitude. 

There  are,  indeed,  some  questions  of  principle  which  it  is  difficult 
to  refer  to  arbitration,  and  which  it  would  be  no  less  difficult  for  an 
arbitrator  to  settle.  Such  are  questions  as  to  the  recognition  of 
the  union :  shall  the  employer  deal  with  his  men  one  by  one,  or  in 
a  body  thru  their  chosen  representatives?     Here,  as  we  have  seen, 


346  PROBLEMS  OF  LABOR  [59-§5 

the  balance  of  social  gain,  and  so  the  answer  to  the  question  of  prin- 
ciple, is  against  the  frequent  contention  of  the  employers.  But  an 
arbitrator  would  have  to  discuss  the  deepest  problems  of  economics 
and  ethics  to  give  a  satisfactory  answer  to  them,  and  certainly 
would  fail  to  convince  both  disputants  even  if  he  attempted  such 
a  discussion.  Again,  as  to  the  closed  shop:  shall  the  employer 
agree  to  employ  only  union  members,  and  discharge  the  non-union 
men?  Here  the  balance  of  social  gain  is  doubtful,  and  the  answer 
to  the  question  of  principle  hard  to  give.  Such  matters  can  never 
be  settled  by  arbitration.  If  the  employees  are  really  set  on  the 
closed  shop,  they  can  get  it  only  by  insistence  and  fight;  and 
whether  they  will  succeed  in  getting  it  and  keeping  it,  depends  on 
the  accumulating  experience  with  the  ill  and  good  of  the  practise. 

Most  disputes,  to  repeat,  and  especially  those  which  are  likely 
to  be  referred  to  arbitrators,  turn  on  matters  of  less  profound  bear- 
ing —  wages,  horn's,  shop  conditions,  and  the  like.  Agreement  on 
these  is  facilitated  by  arbitration  thru  permanent  private  boards 
or  public  boards. 

Permanent  private  boards  rest  on  trade  agreements.  They  de- 
pend on  the  existence  of  organization  among  the  employees  as  well 
as  employers.  Thej'  are  an  outcome  of  collective  bargaining. 
Carried  out  with  rigorous  consistency,  they  entail  the  closed  shop; 
since  they  assume  that  no  agreements  are  made  by  individual  work- 
men. None  the  less,  trade  agreements  may  work  in  practise  with- 
out the  universal  closed  shop,  since  union  terms  and  bargains  set 
a  standard  to  which  the  non-union  establishments  tend  to  conform. 
Such  compacts,  as  they  have  developed  in  course  of  trial,  provide 
for  regular  meetings,  for  a  settled  course  of  procedure,  and  for  refer- 
ence to  arbitrators  of  disputed  points.  It  is  not  necessarily  agreed 
in  advance  that  the  decision  of  the  arbitrators  shall  be  binding. 
Their  function  may  be  that  of  conciliation  rather  than  of  arbitra- 
tion. Indeed,  it  is  probably  better  so;  since  in  any  case  they  can 
have  no  power  to  enforce  an  award.  Whatever  the  precise  stipu- 
lation, such  compacts,  to  repeat,  depend  on  permanent  and  well- 
organized  labor  unions.  It  is  in  so  far  true  that  the  unions  make 
for  industrial  peace.    They  ease  the  process  of  bargaining,  make 


59-§5]  AGENCIES  FOR  INDUSTRIAL  PEACE  347 

for  deliberate  action,  lessen  the  probability  of  frequent  and  unruly 
strikes.  No  doubt,  this  combined  action  of  employers  and  employ- 
ees brings  a  further  danger  —  that  the  two  will  unite  in  a  tight  or- 
ganization, keep  out  other  employers  and  employees,  and  levy  on 
the  public  by  restricting  supply  and  exacting  a  monopoly  price. 
The  seriousness  of  this  danger  depends  on  the  extent  to  which  com- 
petition from  outside  employers  and  non-union  workmen  can  be 
shut  off.  We  have  seen  that,  as  between  workmen,  the  drift  of 
industrial  change  is  against  the  permanent  maintenance  of  a  mo- 
nopoly position.  As  between  the  employing  capitalists,  this  com- 
forting assurance  is  by  no  means  so  clear;  their  striving  for  com- 
bination raises  questions  of  a  somewhat  different  kind  from  those 
here  under  consideration. 

The  same  beneficial  result,  of  lessening  the  number  of  industrial 
disputes,  is  promoted  by  public  boards  of  arbitration,  such  as  have 
been  established  in  many  of  our  states,  in  France,  and  in  England. 
These  are  commonly  boards  of  conciliation  as  we.ll  as  arbitration. 
They  are  authorized  to  offer  their  services  as  mediators  and  concili- 
ators when  a  dispute  occurs,  and  to  make  public  report  of  their 
action  —  sometimes  an  effective  method  of  bringing  public  opinion 
to  bear  in  aid  of  a  settlement.  As  boards  of  arbitration,  they  pro- 
vide a  standing  tribunal  to  which  the  disputants  can  refer,  and  so 
can  save  their  pride  and  probably  their  money.  Their  efficacy 
depends  largely  on  the  character  of  the  individuals  appointed  to 
this  delicate  task.  Even  with  the  best  of  appointees,  and  with  the 
best  exercise  of  judgment  on  their  part,  there  will  be  some  disputes, 
very  possibly  a  large  proportion  of  the  whole,  which  will  not  be  re- 
ferred to  them.  Among  those  which  are  referred,  or  are  taken  in 
hand  without  any  reference  by  the  disputants,  many  must  fail  of 
settlement  by  arbitration  or  conciliation.  The  sj^stem  is  no  pana- 
cea against  strikes  or  losses.  On  the  other  hand,  even  with  limited 
success  it  is  well  worth  while.  Tho  many  grave  cessations  of  work 
have  taken  place  in  spite  of  the  standing  public  boards,  they  more 
than  repay  the  expense  of  maintenance  if  they  succeed  in  prevent- 
ing a  moderate  number  of  struggles.  Arbitration  is  but  a  pallia- 
tive  for  industrial  ills;  none  the  less  it  is  helpful. 


348  PROBLEMS  OF  LABOR  [59-§6 

Publicly  appointed  boards  of  arbitration  have  one  intrinsic  ad- 
vantage over  private  boards.  On  the  latter  it  is  common  to  have 
a  member  selected  by  the  employers,  another  selected  by  the  em- 
ployees, and  a  third  selected  by  these  two  (or  by  some  other 
method  supposed  to  guard  against  bias) .  In  practise,  this  leaves 
the  decision  virtually  to  the  third  member,  and  loses  the  advantage 
of  real  contribution  by  all  the  members  to  fair-minded  considera- 
tion. Public  boards,  especially  when  appointed  in  advance  and 
without  reference  to  the  particular  controversy  or  trade,  are  more 
likely  to  bring  this  advantage.  It  is  an  indication  of  the  inherent 
difficulties  of  the  situation  that  the  contestants  are  apt  to  prefer 
private  boards,  for  the  very  reason  that  each  wishes  to  have  among 
the  judges  at  least  one  advocate. 

§  6.  Quite  a  different  set  of  problems  is  presented  by  compulsory 
arbitration;  that  is,  by  tribunals  to  which  the  contending  employers 
and  employees  must  submit  their  differences  and  by  whose  deci- 
sions they  must  abide.  Such  is  the  system  now  in  use  in  Australia. 
Its  essence  is  that  judicial  tribunals  are  constituted,  to  which  appli- 
cation for  the  settlement  of  disputes  may  be  made  by  either  party. 
The  terms  fixed  by  the  tribunal  become  binding  on  both,  and  failure 
to  carry  on  work  under  these  terms  becomes  a  criminal  offense.  A 
strike  or  lockout  is  punishable  by  fine  or  imprisonment. ^  The  tri- 
bunal may  consist  solely  of  a  person  or  persons  legally  trained  (say 
a  judge  of  the  established  courts  of  law),  or  may  have  in  addition 
persons  conversant  with  the  particular  industries.  Obviously, 
workmen  can  appear  before  such  a  court  only  as  organizations  or 
unions;  for  not  individual  complaints  are  to  be  settled,  but  disputes 
applicable  to  all.  Obviously,  also,  these  organizations  must  be 
open  unions,  and  the  statutes  or  the  courts  must  make  provision 
for  their  being  open.     It  is  hardly  less  essential  that  the  employers 

1  In  New  Zealand,  where  the  first  compulsory  arbitration  law  was  passed  (in 
1896),  a  strike  or  lockout  became  a  criminal  offense  only  if  one  of  the  parties  has 
made  application  to  the  arbitration  court.  "If  both  parties  prefer  to  settle  their 
difficulties  by  a  strike,  the  law  permits  them  to  do  this."  In  the  New  South  Wales 
law  (1901),  however,  every  strike  or  lockout,  prior  to  or  pending  consideration  by 
the  court  was  a  misdemeanor  and  punishable  as  such.  In  other  words,  in  New  South 
Wales,  all  disputes  had  to  be  referred  to  the  arbitration  court.  See  V.  S.  Clark,  The 
Labor  Movement  in  Australasia,  pp.  189,  191. 


59-§6]  AGENCIES  FOR  INDUSTRIAL  PEACE  349 

should  be  organized,  since  for  them  also  there  are  to  be  rates  and 
rules  of  general  application.  The  system  thus  involves  a  court, 
powers  of  coercion  by  that  court,  and  the  organization  of  both  em- 
ployers and  employees  as  parties  to  the  proceedings  before  it. 

The  settlement  of  wages  under  such  a  system  is  likely  to  be  com- 
paratively easy  at  the  outset.  The  adjudicated  rates  of  wages  are 
likely  to  be,  when  first  fixed,  somewhat  higher  than  those  previ- 
ously current;  but  still  "fair,"  and  not  higher  to  such  an  extent  as 
to  present  a  real  question  of  principle.  There  is  usually  a  certain 
amount  of  slack  in  industrial  arrangements  which  can  be  taken  up 
without  serious  strain.  As  time  goes  on,  the  workmen  and  the 
community  in  general  will  again  become  accustomed  to  the  new 
scale.  The  workmen,  it  is  almost  certain,  will  before  long  ask  for 
more,  and  then  for  more  and  still  more;  until  finally  the  tribunal 
will  be  compelled  to  consider  how  far  it  can  go  in  modifying  the 
terms  of  distribution.  WTiere  stop?  What  are  "fair"  wages? 
That  question  cannot  be  settled  without  settling  what  is  fair  inter- 
est and  fair  business  profits.  Ultimately,  the  tribunal  must  deter- 
mine what  is  fundamentally  just;  how  much  the  owners  of  wealth 
are  justly  entitled  to  in  the  way  of  interest;  what  is  a  just  return 
to  the  employer  in  the  way  of  business  profits;  why  some  laborers 
are  to  receive  more  than  others,  and  what  is  just  as  between  the 
different  groups. 

In  other  words,  this  sort  of  labor  legislation  involves  a  very  dif- 
ferent attitude  toward  competition  from  that  which  underlies 
factory  legislation,  regulation  of  hours,  children's  work,  minimum 
wages.  These  aim  to  modify  the  plane  of  competition.  They  pro- 
hibit some  of  the  labor  bargains,  or  impose  upon  all  employers  re- 
quirements as  to  safety,  cleanliness,  health.  Compulsory  arbitra- 
tion, carried  to  the  limit,  does  not  content  itself  with  defining  the 
bounds  within  which  competition  shall  work.  It  supplants  com- 
petition. Wages,  interest,  profits,  are  not  to  be  determined  by 
the  bargaining  of  employers  and  employees,  with  liberty  for  each 
party  to  desist  at  will  and  see  how  the  other  can  get  on  without. 
They  are  to  be  fixed  by  public  authority;  and  this  involves  settle- 
ment by  public  authority  of  the  distribution  of  wealth. 


350  PROBLEMS  OF  LABOR  [59-§6 

This  ultimate  problem  may  be  disguised  and  postponed.  It  is 
conceivable  that  it  will  be  postponed  indefinitely.  The  force  of 
custom  is  enormously  strong.  Possibly  the  workmen  will  never 
push  their  demands  so  far  as  to  raise  the  question  of  the  ultimate 
limit.  They  may  content  themselves  with  such  minor  changes  as 
are  constantly  taking  place  under  the  influence  of  general  economic 
causes  and  are  disposed  of  with  substantially  the  same  results  by 
voluntary  arbitration  and  trade-union  activity.  Such  has  been 
hitherto,  in  the  brief  period  during  which  it  has  been  on  trial,  the 
working  of  compulsory  arbitration  in  Australia.  With  the  increas- 
ing political  power  of  the  laborers,  their  quick  habituation  to  any 
higher  scale  of  wages,  and  their  recurring  demands  for  wages  still 
higher,  it  is  probable  that  the  fundamental  problem  will  sooner  or 
later  have  to  be  faced,  and  somehow  solved. 

What  the  outcome  then  might  be,  it  would  be  rash  to  predict. 
Indefinite  increase  of  all  wages  means  a  cutting  down  of  the  returns 
to  investors  and  business  men,  and  —  so  we  should  argue  on  the 
basis  of  our  general  theorizing  on  distribution  —  an  eventual  check 
to  accumulation  and  to  business  enterprise.  This  may  lead  to  an 
early  reaction,  and  to  a  reduction  of  wages  once  more  to  rates  con- 
sistent with  the  present  mode  of  conducting  industry.  Or  it  may 
lead  (and  this  is  equally  possible)  to  still  further  radical  changes 
—  a  steady  assumption  of  many  sorts  of  business  management  by 
the  state,  and  the  appropriation  or  purchase  by  the  state  of  the 
capital  now  owned  by  investors  and  managed  by  business  men.  In 
other  words,  it  may  lead  to  a  trial  of  socialism,  which  puts  into  effect 
without  disguise  the  same  principle  —  the  settlement  of  distri- 
bution by  the  state.  Few  people  see  that  the  scheme  for  compul- 
sory arbitration  points  to  changes  so  far-reaching.  Nothing  of  the 
sort  was  contemplated  when  it  was  established  in  New  Zealand  and 
the  other  Australian  colonies,  and  tho  it  has  already  become  appar- 
ent that  much  more  is  involved  than  a  device  for  merely  patching 
up  industrial  disputes,  the  full  possibilities  do  not  yet  loom  up  be- 
fore the  Australians.  The  course  of  their  experiment  will  be 
watched  with  interest  by  all  students  of  social  and  economic  prob- 
lems; both  to  see  whether  the  temper  of  the  workmen  will  lead  them 


59-§6]  AGENCIES  FOR  INDUSTRIAL  PEACE  351 

to  press  their  demands  to  the  Hmit,  and  what  may  be  the  conse- 
quences if  they  do.  Many  years  will  probably  elapse  before  this 
experiment  will  have  been  carried  so  far  as  to  make  clear  the  ulti- 
mate outcome. 

During  the  intermediate  stage,  when  no  very  radical  changes  are 
attempted  —  a  stage  which,  as  has  just  been  said,  may  be  pro- 
longed indefinitely  —  one  other  difficulty  is  more  than  likely  to 
appear:  how  to  enforce  the  arbitration  decisions  when  they  prove 
to  be  against  the  workmen.  Enforcement  against  the  employers 
is  easy  enough.  They  have  propert}^,  usually  ample  and  visible, 
and  they  can  be  brought  to  book  by  fines.  Against  employees  fines 
must  remain  a  merely  nominal  mode  of  enforcement.  Quite  apart 
from  the  expense  of  collecting  driblets  of  fines  from  scattered  work- 
men, the  political  odium  of  the  proceeding  will  prevent  any  demo- 
cratic government  from  pushing  it  far.  Experience  of  this  kind  — 
that  compulsory  arbitration  works  in  effect  one  way  only  —  may 
possibly  lead  to  a  radical  change  in  the  whole  system  before  it  is 
carried  to  the  stage  of  bringing  the  fundamentals  of  distribution 
to  a  test. 


CHAPTER  60 
Workmen's  Insurance.    Poor  Laws 

Section  1.  Irregularity  of  earnings  and  its  causes,  352  —  Sec.  2.  Provision 
against  accident  is  feasible  thru  insurance.  The  German  sj^stem,  the  Eng- 
lish, the  French.  The  charges,  tho  levied  on  the  employer,  are  likely  to 
come  ultimately  out  of  wages,  353  —  Sec.  3.  Insurance  against  sickness 
no  less  feasible.  The  Friendly  Societies,  the  German  system  of  compul- 
sory insurance.  The  possibility  of  malingering  and  the  need  of  super- 
vision, 357  —  Sec.  4.  Old-age  pensions  in  European  countries  and  in 
Austraha.  Are  they  deterrents  to  thrift?  The  pecuniary  difficulties 
not  insuperable,  359  —  Sec.  5.  The  situation  in  the  United  States  as  to 
accidents  long  chaotic;  the  need  of  reform.  Rapid  spread  of  compensa- 
tion for  accident.  The  pohtical  difficulties  in  the  way  of  this  reform  and 
others,  362  —  Sec.  6.  Unemployment,  tho  it  tends  to  correct  itself,  is  a 
continuing  phenomenon.  Difficulties  of  applying  any  method  of  insur- 
ance. Possibility  of  supplementing  trade-union  out-of-work  benefits. 
The  British  National  Insurance  act  of  1911.  Relief  works,  364  —  Sec.  7. 
Poor  laws:  the  conflict  between  sympathy  and  caution.  Relief  may  be 
liberal  where  no  danger  of  demoralization  exists.  For  the  able-bodied,  it 
needs  to  be  administered  with  the  utmost  caution,  369. 

§  1.  Irregularity  of  earnings  is  a  much  more  frequent  cause  of 
distress  than  are  earnings  absolutely  small.  Men  accommodate 
themselves  to  almost  any  income  not  below  the  bare  minimum. 
Few  men  provide  adequately  for  vicissitudes.  Where  the  margin 
between  receipts  and  necessary  expenditures  is  slight,  any  inter- 
ruption of  income  means  suffering.  Even  when  the  earnings  are 
such  as  to  make  possible  a  sufficient  provision,  by  savings  or  insur- 
ance, the  provision  is  not  often  made.  How  to  mitigate  the  con- 
sequent suffering  among  the  great  mass  of  the  population  is  one  of 
the  most  urgent  of  social  problems.  It  is  a  problem,  too,  to  which 
more  and  more  attention  has  been  given  in  recent  times.  This 
increase  of  attention  has  not  been  due  to  greater  irregularity  in 
earnings  or  greater  need  of  provision  for  contingencies.  I  know 
of  no  satisfactory  evidence  to  show  whether  the  chances  of  illness 

352 


60-§2]         WORKMEN'S  INSURANCE.    POOR  LAWS  353 

uncared  for,  of  disabling  accident,  penniless  old  age,  are  greater 
now  than  in  former  times.  But  the  modern  world  is  clearly  more 
sensitive  to  the  evils.  Here,  as  elsewhere,  conditions  accepted  in 
former  days  as  matters  of  course  are  now  regarded  as  intolerable, 
and  a  strenuous  effort  is  made  to  remedy  them. 

Accident,  sickness,  old  age,  unemployment  —  these  are  the  main 
causes  of  irregularity  in  earnings.  As  to  all,  it  will  be  necessary  to 
keep  in  mind  a  large  question  of  principle :  how  far  can  aid  be  pro- 
vided without  undermining  the  character  and  thrift  of  the  indi- 
vidual? 

§  2.  Provision  against  accident  should  be  arranged  thru  insur- 
ance. The  only  question  can  be  as  to  the  best  way  of  making  the 
insurance  effective.  By  far  the  most  important  class  of  accidents, 
tho  not  the  only  important  one,  is  that  of  accidents  to  workmen 
occurring  in  the  course  of  their  employment.  Such  will  infallibly 
occur ;  and  it  is  equally  certain  that  no  effective  provision  will  be 
made  against  them  by  the  workmen  themselves.  It  is  even  doubt- 
ful whether  that  sort  of  rough  provision  is  made  which  w^ould 
appear  in  a  higher  rate  of  pay  in  hazardous  employments.  The 
risks  of  injury  in  an  employment  are  accepted  by  almost  all  work- 
men with  virtually  no  attention  or  allow^ance;  and  when,  sooner 
or  later,  the  inevitable  disaster  occurs,  they  or  their  dependents 
are  left  helpless. 

The  chance'-of- accident  varies  in  different  occupations.  It  is 
sufficiently  well  ascertained  in  most  occupations  to  be  susceptible 
of  insurance,  both  for  accidents  having  a  fatal  result  and  for  those 
bringing  permanent  or  temporary  disability.  When  once  the  pos- 
sibility of  dealing  with  them  on  actuarial  principles  is  clear;  when 
it  is  certain  that  the  workmen  themselves  will  not  insure;  and  when 
the  sense  of  social  sympathy  and  duty  becomes  so  strong  that  pro- 
vision of  some  sort  is  insisted  on  —  the  only  solution  is  to  make 
the  employers  responsible.  Let  them  do  the  insuring,  paying  pre- 
miums from  time  to  time  which  will  enable  a  death  benefit  or  pen- 
sion to  be  paid  to  the  widows  and  orphans,  or  a  pension  to  the  dis- 
abled workmen  themselves.  The  premiums  required,  if  paid  uni- 
formly by  all  employers  of  a  given  trade,  will  enter  into  the  expenses 


354  PROBLEMS  OF  LABOR  [60-§2 

of  production  of  all  and  will  affect  in  corresponding  degrees  the 
prices  of  the  commodities  sold.  Such  a  plan  will  have  far-reaching__ 
effect  only  if  it  is  made  of  compulsory  and  universal  application, 
and  if  the  mere  fact  of  employment  fixes  the  obligation  of  the  em- 
ployer, irrespective  of  any  agreement  between  him  and  the  em- 
ployee. 

The  desired  result  of  assured  provision  can  be  secured  either  by 
requiring  the  employers  to  organize  directly  in  insurance  associa- 
tions of  their  own,  or  by  simply  imposing  on  them  a  liability  against 
which  they  can  insure  in  companies  existing  for  this  purpose.  Of 
the  former  type  of  procedure,  Germany  supplied  the  earliest  and 
most  conspicuous  example;  of  the  latter.  Great  Britain.  The  Ger- 
man system,  established  (1884)  as  the  first  part  of  the  Empire's 
elaborate  system  of  workmen's  insurance, ^  compels  the  employers 
in  each  trade  to  form  a  sort  of  insurance  company  carefully  super- 
vised by  the  government,  to  contribute  premiums  adjusted  to  the 
risk  of  accident,  and  thereby  to  enable  the  pa^Tiient  of  pensions  to 
disabled  workmen  (at  the  rate  of  two  thirds  their  former  wages  for 
those  completely  disabled)  and  corresponding  pensions  to  widows 
and  minor  children.  The  British  Workmen's  Compensation  Act 
(1897),  on  the  other  hand,  simply  provides  that  the  employer  must 
pay  a  pension  (of  one  half  the  former  wages)  in  case  of  disabijityr- 
and  in  case  of  death  a  lump  sum  amounting  to  three  years'  wages, 
with  stated  minima  and  maxima.  In  what  manner  he  shall 
make  the  provision  is  left  to  his  own  discretion.  In  practise 
he  almost  always  insures  in  an  employers'  liability  company;  very 
few  employers  carry  on  their  operations  on  so  large  a  scale  and 
with  such  continuity  as  to  make  it  safe  to  insure  themselves.  Sub- 
stantially on  the  same  principle  is  the  French  system  (established 
1898)  where  the  pension  in  case  of  tptal  disability  is  two  thirds  of 
the  wagies  rate,-  and  where  also  the  design  and  the  effect  is  to  com- 
pel employers  to  carry  insurance  against  their  unqualified  liability. 
The  German  method  is  natural  in  a  country  where  the  public 

1  This  system  forms  a  consistent  whole,  and  might  be  dcscriljedas  a  whole;  but 
the  different  parts  are  here  taken  up  separately,  according  as  they  involve  different 
phases  of  the  problem. 


60-§2]         WORKMEN'S  INSURANCE.     POOR  LAWS  355 

administrative  system  is  developed  to  high  efficiency,  and  where 
doigiled-super vision  by  government  authority  is  helpful  and  not  un- 
welcome. The  English  and  French  methods  are  adapted  to  com- 
munities whose  traditions  and  habits  are  against  such  faj-jea-ching 
government  regulation.  Each  makes  certain,  tho  not  in  the  same 
way  or  quite  to  the  same  extent,  provisions  against  accidents 
occurring  in  the  course  of  employment. ^ 

No  objection  of  principle  can  be  raised  against  such  a  system. 
Injuries  from  accident  cannot  be  shammed,  nor  will  they  be  in- 
curred of  set  purpose.  No  doubt  they  will  be  incurred  thru  negli- 
gence. The  negligence  is  probably  not  made  greater  by  the  assur- 
ance of  prevision.  It  remains  the  sarne,  unfortunately,  whether 
the  workman  knows  or  does  not  know  that  he  will  be  taken  care  of 
if  anything  happens.  Negligence  can  be  offset  effectively  only  by 
introducing  safety  appliances,  by  guarding  machinery,  by,  stringent 
discipline  —  precautions  which  the  employer  is  stimulated  to 
adopt  when  he  is  certain  that  the  amount  of  his  premiums  will  be 
lessened  by  them.  In  the  legislation  both  of  Germany  and  of  Great 
Britain  it  is  enacted  that  a  workman  who  intentionally  brings  an  in- 
jury on  himself  shall  have  no  claim;  but  this  sort  of  contingency 
may  be  disregarded.  Tho  there  is  a  danger  that  accidents  and 
their  consequences  will  be  made  to  appear  more  serious  than  they 
are,  in  order  that  idleness  and  a  pension  may  continue  longer,  the 
possibilities  of  malingering  remain  small  as  compared  with  those 
under  insurance  against  sickness.  On  the  whole,  the  human  im- 
pulse need  not  be  held  in  check  by  a  fear  that  the  immediate  relief 
of  suffering  will  be  followed  by  demoralization  of  the  sufferer. 

Who  ultimately  bears  the  charges  which  under  such  a  system  are 
first  imposed  on  the  employers?  It  is  sometimes  reasoned  that 
they  will  fall  on  consumers.  Employers,  no  doubt,  will  bear  them 
at  first,  as  they  would  bear  a  tax  (and  indeed  compulsory  payments 
of  this  sort  are  difficult  to  distinguish  from  taxes).     In  the  end  the 

1  It  should  be  noted  that  the  English  statute  gives  the  workman  an  option  be- 
tween proceeding  under  the  Compensation  Act  and  suing  the  employer  for  his  lia- 
bility under  the  law  as  it  stood  before.  The  trend  is  for  less  and  less  recourse  to  the 
latter  method,  and  more  and  more  resort  to  the  Compensation  Act;  and  it  is  prob- 
able that  resort  to  employers'  liability  of  the  old  sort  will  eventually  disappear. 


356  PROBLEMS  OF  LABOR  [60-§2 

charges  are  expected  to  influence  prices,  as  will  any  other  additions 
to  the  expenses  of  production.  Hence  it  is  argued  they  will  be 
borne  finally  by  consumers.  Obviously  this  sort  of  reasoning  needs 
to  be  qualified  as  much  as  similar  reasoning  applied  to  taxes. ^  It 
is  true  that  a  taxj^n  any  commodity  raises  its  price,  and  affects  the 
consumers,  not  the  capitalist  producers  or  employers.  But  a  tax 
on  all  commodities  cannot  raise  alj  prices.  So  far  as  insurance 
premiums  bear  more  heavily  on  one  industry  than  on  another,  they 
will  have  an  effect,  under  competitive  conditions,  on  relative  prices, 
and  so  will  be  felt  by  the  consumers  of  those  things  made  in  the  haz- 
ardous industries.  But  so  far  as  they  bear  on  all  industries  alike 
prices  will  not  be  affected.  Employers  must  accept  the  charge 
once  for  all,  subject  to  only  one  avenue  of  escape  —  they  qjaj^ 
lower  v/ages,  directly  or  indirectly,  immediately  or  ultimately. 
Direct  and  immediate  reductions  of  wages  are  highly  improbable. 
Here,  as  in  other  similar  situations,  there  is  likely  to  be  enough 
slack  in  the  adjustment  of  wages  and  profits  to  enable  some  tighten- 
ing, some  drain  on  profits,  without  immediate  effect  on  wages. 
When  such  a  system  is  in  steady  operation,  however,  and  has  been 
for  some  time  in  operation,  every  employer  knows  that  the  act  qf_, 
employment  involves  not  only  wages,  but  these  additional  charges 
also.  His  calculations  must  be  correspondingly  affected.  The 
outcome  is  likely  to  be  that  the  insurance  charges  will  ultioiaiely- 
come  out  of  the  workmen's  own  earnings.  This  will  not  necessarily 
take  place  by  any  process  of  direct  reductions  in  wages.  More 
probable,  in  progressive  countries  like  Germany  and  England,  is  a 
failure  of  wages  to  advance  as  much  as  they  would  otherwise  do. 
Obviously  it  is  no  objection  to  an  insurance  system  that  the  premi- 
ums ultimately  come  from  the  beneficiaries  themselves. 

In  case  of  industries  having  a  monopoly  or  quasi-monopoly,  this 
shifting  of  the  charges  is  much  less  likely  to  take  place.  Such  in- 
dustries will  indeed  share  with  others  any  general  effects  on  all 
j  wages.  So  far,  however,  as  they  are  subject  to  special  charges, 
j  they  will  probably  bear  the  charges  once  for  all,  just  as  they  will 
Vij)robably  bear  special  taxes  once  for  all. 

1  Compare  what  is  said  below,  Chapter  71 ,  on  the  incidence  of  taxes. 


6(>-§3]         WORKMEN'S  INSURANCE.    POOR  LAWS  357 

Employers  on  a  large  scale  accommodate  themselves  most  easily 
to  a  compulsory  insm-ance  system.  They  have  large  resom*ces, 
allow  a  good  margin  for  contingencies  of  all  sorts,  commonly  lay 
their  plans  with  reference  to  considerable  periods.  Smaller  em- 
ployers are  less  able  to  adjust  themselves  to  additional  expenses. 
The  rigorous  application  of  any  form  of  labor  legislation,  whether 
in  the  way  of  restriction  or  of  compulsory  expense,  tends  to  hasten 
the  development  of  large-scale  production;  a  result  which  is  in  ac- 
cord with  the  general  trend  of  modern  industry,  yet  is  not  welcome 
to  most  persons  who  have  at  heart  plans  of  this  kind  for  social 
reform. 

A  considerable  proportion  of  mishaps  are  not  provided  for  by 
insurance  tia  the  employers.  Accidents  to  independent  artisans, 
to  those  in  the  service  of  petty  employers  exempted  from  the  gen- 
eral system,  most  of  all,  accidents  not  occurring  in  the  course  of 
working  operations,  are  not  included.  It  is  possible  and  desirable 
to  give  an  opportunity  in  some  of  these  cases  (to  independent  arti- 
sans, for  example)  to  join  of  their  own  volition  the  insurance  sys- 
tem; unfortunately  this  opportunity  is  likely  to  be  availed  of  only 
in  a  small  proportion  of  cases.  A  large  place  is  still  left  for  private 
charity  and  public  poor  relief. 

§  3.  Insurance  against  sickness  is  as  feasible  as  insurance  against 
accident.  It  is  even  more  feasible,  since  longer  observation  has  sup- 
plied more  adequate  data  on  the  frequency  of  illness  in  great  mod- 
ern communities,  and  on  its  greater  frequency  with  advancing  age ; 
while  the  progressive  gain  in  ways  of  healthful  living  has  introduced 
a  factor  of  safety  which  is  not  found  in  accident  insurance. 

Saving  against  a  rainy  day  —  a  rough  sort  of  insurance  against 
illness  as  well  as  other  mishaps  —  is  common  among  the  well-to-do 
and  the  lower  middle  class.  In  the  latter  class  and  among  the 
skilled  artisans,  there  has  been  considerable  development  of  insur- 
ance proper.  The  Friendly  Societies  of  Great  Britain  —  the  Odd 
Fellows,  the  Foresters,  and  other  important  associations  —  have 
carried  on  insurance  against  illness  (and  other  ill  fortune  also)  on  a 
large  scale.  Branches  or  outgrowths  from  them,  and  imitations  of 
them,  have  done  the  same  thing  in  the  United  States;  and  there  are 


358  PROBLEMS  OF  LABOR  [60-§3 

some  associations  of  this  type  in  most  countries.  They  provide 
commonly  against  disability  of  all  sorts,  whether  the  result  of  ill- 
ness or  of  accident.  The  same  is  done  by  the  British  trade  unions, 
among  whom  the  benefit  system  has  an  established  and  important 
part,  including  sick  pay  as  well  as  trade  benefits  (strike  pay  and  the 
like).  It  is  true  that  the  premiums  or  dues  of  all  these  organiza- 
tions are  commonly  inadequate.  They  promise  more  for  a  given 
weekly  premium  than  they  are  able  in  the  long  run  to  furnish. 
Like  the  "fraternal"  life  insurance  organizations  which  have  had 
and  still  have  such  a  vogue  in  the  United  States,  they  undertake 
to  pay  amounts  greater  than  their  dues  warrant  them  in  under- 
taking on  sound  actuarial  principles.  None  the  less,  and  notwith- 
standing frequent  collapses,  they  have  done  great  service  in  miti- 
gating the  hardships  from  illness  and  consequent  loss  of  earnings. 
Their  serious  and  irremediable  defect  is  that  they  reach  only  a  class 
comparatively  prosperous  —  tradesmen,  persons  on  steady  salaries, 
skilled  artisans. 

It  is  this  failure  to  reach  the  great  mass  of  the  people  that  led  the 
German  statesmen  to  adopt  the  compulsory  (and  therefore  univer- 
sal) system  for  sickness  insurance  as  well  as  for  other  forms.  No 
other  method  will  bring  relief  with  certainty  to  those  needing  it 
most.  The  German  law  of  1883,  the  first  in  time  of  this  great  series 
of  measures,  established  associations,  commonly  organized  by  lo- 
cality (one  for  each  town  or  rural  district),  in  which  all  workmen 
are  insured  against  sickness.  Contributions  are  payable  by  em- 
ployers, whose  obligation  to  pay  is  fixed  by  the  act  of  employment; 
but  they  may  deduct  two  thirds  of  the  amounts  from  the  stipulated 
wages  (the  remaining  third  being  a  charge  on  the  employer  him- 
self). The  workman  gets,  while  ill,  one  half  his  usual  wages,  and 
in  addition  free  medical  treatment;  in  case  of  need,  hospital  treat- 
ment.^ The  ramifications  and  details  of  the  system  are  carefully 
worked  out;  they  call  for  an  enormous  and  skillfully  developed  or- 

1  Cases  of  injury  from  accident  are  treated  in  the  German  system  as  cases  of  ill- 
ness during  the  first  thirteen  weeks  (one  fourth  of  a  year) .  Only  if  disability  from  ac- 
cident endures  beyond  thirteen  weeks,  that  is,  in  case  of  long-continued  and  pre- 
sumably permanent  disability,  does  the  machinery  of  accident  insurance  begin  to 
apply. 


6(>-§4]         WORKMEN'S  INSURANCE.     POOR  LAWS  359 

ganization;  they  secure,  for  practically  every  person  employed  at 
wages,  a  sufficient  provision  in  case  of  illness. 

The  question  of  principle  presents  itself  somewhat  differently 
in  this  case.  Illness  may  be  shammed ;  malingering  is  a  clear  pos- 
sibility. For  many  a  laborer  half  pay  and  no  work  make  an  attrac- 
tive combination.  The  administration  of  any  system  of  sick  insur- 
ance hence  calls  for  watchfulness.  The  Friendly  Society,  whose 
local  lodge  is  made  up  of  a  comparatively  small  number  of  persons 
known  to  each  other,  can  supervise  its  benefits  without  cumber- 
some machinery  and  yet  with  sufficient  checks.  A  visit  from  a 
committee  of  members  attests  sympathy  and  at  the  same  time  se- 
cures an  inspection  of  the  invalid.  The  system,  tho  not  without 
opportunity  for  fraud,  yet  has  a  quasi-automatic  safeguard  against 
malingering.  The  same  is  the  situation  where  trade  unions  pro- 
vide sick  benefits.  A  great  compulsory  system,  in  which  thou- 
sands of  persons  (as  in  a  city)  are  insured  against  sickness,  calls  for 
the  most  watchful  management  —  physicians'  visits  and  reports, 
elaborate  records,  systematic  supervision,  more  or  less  of  red  tape. 
If  badly  administered,  it  is  likely  to  become  demoralizing  to  the 
recipients  of  aid,  and  in  the  end  more  harmful  to  them  than  com- 
plete indifference  and  abstention  from  aid. 

It  is  said  that  no  such  evil  consequences  have  appeared  on  any 
large  scale  in  the  German  system.  True,  there  has  been  malinger- 
ing, and  measures  to  stop  it  have  had  to  be  considered.  On  the 
whole  these  drawbacks  have  been  no  greater  than  was  inevitable; 
and  the  social  gain  has  vastly  exceeded  the  loss.  The  adminis- 
tration of  the  German  system  of  workmen's  insurance,  as  a  whole, 
has  been  in  high  degree  efficient.  Substantial  aid  to  the  afflicted 
has  been  combined  with  safeguards,  adequate  on  the  whole,  against 
fraud.  Hardly  another  country  possesses  the  staff  of  trained  pub- 
lic servants  needed  for  planning  and  administering  so  vast  a  ma- 
chinery for  social  reform ;  and  the  Germans  are  justly  proud  of  what 
they  have  here  achieved. 

§  4.  Old  age  is  a  contingency  in  this  sense,  that  no  one  knows 
whether  he  will  reach  it.  Provision  for  old  age  can  be  made  by 
insurance,  and  is  so  made,  to  some  degree,  by  the  well-to-do,  thru 


360  PROBLEMS  OF  LABOR  [60-§4 

insurance  companies.  Even  among  the  well-to-do,  it  is  not  often 
made  systematically.  In  the  social  tier  below  that  of  the  well-to- 
do,  friendly  societies  and  trade  unions  sometimes  have  a  system  of 
superannuation  benefits ;  but  it  is  effective  only  for  an  insignificant 
proportion  of  their  constituency.  Among  the  masses  of  the  pop- 
ulation there  is  commonly  no  set  provision  of  any  sort  for  old  age; 
and  when  infirmity  comes,  the  aged  are  dependent  on  the  younger 
generation  or  on  charity.  There  is  nothing  more  pathetic  than  the 
position  of  the  workman,  skilled  or  unskilled,  who  has  passed  the 
age  of  efficiency,  has  no  resources,  and  is  a  burden,  often  borne 
grudgingly,  on  a  household  with  slender  resources. 

Old-age  pensions  are  now  provided  by  public  authority  in  sundry 
countries.  The  German  system  (1889)  includes  them,  and  applies 
to  them  rigorously  the  principle  of  insurance.  Employers  there 
pay  the  premiums,  with  the  same  arrangement  as  in  sick  insurance 
for  deducting  from  wages  part  of  what  they  advance.  One  half  of 
the  premiums  can  be  so  deducted,  the  other  half  remaining  as  a 
charge  on  the  employers;  while  a  fixfed  sum  is  contributed  toward 
each  pension  by  the  nation,  that  is,  by  the  taxpayers.  The  amount 
of  the  premiums  due  for  each  workman,  and  the  pension  payable  to 
him,  vary  according  to  his  wages.  This  system  requires  an  enor- 
mous amount  of  bookkeeping,  an  enormous  investment  of  accu- 
mulating funds,  and  ver^^  expensive  administration.  Probably  it 
is  unnecessarily  cumbrous;  yet  the  French  insurance  system,  es- 
tablished in  1910,  reproduces  its  characteristic  provisions.  Much 
simpler  is  the  plan  of  giving  to  every  workman  or  to  every  needy 
workman,  once  for  all,  from  the  public  funds,  a  pension  on  reaching 
a  given  age  limit.  This  is  what  is  done  in  the  English-speaking 
countries  which  have  established  old-age  pensions,  in  Great 
Britain  herself,  and  in  Australia  and  New  Zealand.  In  all  of  these, 
to  be  sure,  the  pension  is  subject  to  reduction  according  to  appli- 
cant's need.  Only  those  having  no  other  income,  or  but  a  slender 
income,  are  pensionable;  and  in  the  Australian  states  there  is  a 
restriction  also  for  those  who  have  some  accumulated  means. 

Old  age  cannot  be  shammed ;  so  far,  an  old-age  pension  can  lead 
to  no  demoralization.    But  it  is  maintained  that  it  will  discourage 


60-§4]         WORKMEN'S  INSURANCE.     POOR  LAWS  361 

thrift,  since  it  takes  away  the  incentive  to  make  independent  pro- 
vision. Unfortunately  there  is  in  fact  no  appreciable  amount  of 
thrift  to  be  discouraged,  least  of  all  among  the  great  mass  of  manual 
workers.  They  exercise  no  thrift  and  make  no  provision,  and  they 
are  not  likely  to  do  so.  Some  small  accumulation  of  capital  funds 
there  may  be  on  their  part;  and  it  is  probably  unwise  to  make  such 
accumulation  a  bar  to  a  pension,  or  a  ground  for  reducing  the 
amount  of  the  pension,  as  is  done  in  the  Australian  states.  The 
British  regulations  are  in  this  regard  better,  in  that  they  make  the 
possession  of  an  income  alone  (not  that  of  a  principal  sum)  a  ground 
for  reducing  or  refusing  a  pension.  The  German  plan,  being  one 
of  insurance  strictly,  pays  no  attention  to  any  income  or  property 
which  the  claimant  may  have.  He  gets  his  pension  as  a  matter  of 
right,  in  virtue  of  the  premiums  paid  on  his  account  thru  the  pre- 
ceding years;  and  anything  he  has  done  for  himself,  in  the  way  of 
savings,  inures  to  his  benefit  without  diminution  of  the  pension. 
But,  to  repeat,  voluntary  provision  for  old  age  is  a  negligible  ele- 
ment. If  there  were  such,  it  might  be  discouraged  by  old-age  pen- 
sions; virtually  there  is  none. 

Those  who  favor  universal  old-age  pensions  are  influenced  not 
only  by  the  growing  strength  of  altruism,  but  by  the  belief  that 
such  aid  does  not  really  discourage  thrift  or  independence.  It 
meets  a  need  which  all  know  to  be  inevitable,  which,  however,  few 
provide  for  until  it  is  nearly  on  them.  Old-age  pensions  are  fa- 
miliar for  some  persons  of  the  comparatively  well-to-do  classes, 
such  as  teachers  and  public  officials.  These  pensions  are  not  found 
to  discourage  thrift  or  undermine  character,  and  they  prevent  much 
anxiety  and  suffering.  Why  should  there  not  be  a  similar  balance 
of  good  in  the  case  of  aged  workmen? 

Obviously,  a  system  of  old-age  pensions  must  entail  a  very  heavy 
financial  burden.  Where  the  provision  is  made  once  for  all  by  the 
state,  the  needed  sums  must  be  got  by  taxation;  and  the  difficulty 
of  getting  the  money  is  often  regarded  as  an  insuperable  obstacle. 
As  in  most  matters  of  public  expenditure,  the  question  here  is  not 
whether  the  community  can  raise  the  revenue,  but  whether  it  really 
wishes  to.  When  a  country  plunges  into  war,  treasure  is  poured  out 


362  PROBLEMS  OF  LABOR  [60-§5 

on  a  scale  that  would  cover,  many  times,  the  expenditure  needed 
for  the  contested  social  reforms.  If  the  impulse  of  sympathy  were 
as  strong  as  the  ancient  and  brutal  fighting  instinct,  we  should  hear 
little  of  financial  obstacles  in  the  way  of  schemes  for  far-reaching 
social  improvements. 

§  5.  In  the  LTnited  States  the  whole  movement  for  workingmen's 
insurance  or  pensions  long  made  slow  headway.  The  situation  is 
in  striking  contrast  with  that  in  the  other  civilized  countries,  great 
and  small.  Elsewhere  there  is  unceasing  discussion  of  the  ways  of 
relief  by  public  action,  and  steady  progress  in  legislation.  In  this 
country  w^e  are  as  backward  as  in  many  other  matters  of  social  re- 
form. We  are  wont  to  flatter  ourselves  that  our  condition  is  a  su- 
perior one,  and  that  we  are  not  confronted  with  the  same  social  and 
industrial  evils  as  older  countries.  The  superiority  is  only  one  of 
degree,  and  no  longer  a  great  one  at  that.  The  need  for  ameliora- 
tion is  hardly  less. 

So  far  as  provision  for  accident  goes,  our  case  long  was  wretched. 
There  was  supposed  to  be  a  liability  on  the  employers  for  injuries 
occurring  to  workmen  in  the  course  of  their  employment.  But 
the  liability  (varying  according  to  the  judicial  decisions  and  the 
statutes  of  the  several  states)  was  so  hedged  in  by  sundry  legal  limi- 
tations, and  so  beset  with  uncertainties,  that  it  brought  a  provision 
only  in  a  small  minority  of  cases.  Most  cases  were  settled  out  of 
court  by  a  compromise  between  the  parties,  with  outcomes  varying 
according  to  the  helplessness  of  the  victim  and  the  astuteness  of 
employers'  counsel.  Where  cases  got  into  court,  the  question 
whether  the  workman  should  get  compensation  depended  on  the 
lottery  (such  it  virtually  w^as)  of  a  suit  at  law  and  a  trial  by  jury. 
The  lottery  occasionally  brought  a  prize  to  an  injured  laborer,  in 
the  shape  of  a  heavy  lump  sum  in  damages.  This  sort  of  prize 
blinds  the  workmen  at  large  to  the  immensely  greater  number  of 
cases  in  which  nothing  is  got.  They  overestimate  the  prize,  just 
as  they  underestimate  the  chance  of  injury  in  dangerous  occupa- 
tions. In  its  general  outcome,  the  situation  illustrated  strikingly 
the  possibilities  of  waste  in  the  individualistic  system.  Most  of 
the  energy  of  those  engaged  in  the  disposal  of  accident  cases  — 


60-§5]         WORKMEN'S  INSURANCE.    POOR  LAWS  363 

judges,  jurymen,  lawyers,  casualty  managers  —  was  simply  un- 
productive of  social  gain. 

This  situation  was  so  obviously  bad,  and  the  example  of  other 
countries  pointed  so  clearly  to  the  remedy,  that  a  great  change  set 
in  during  the  second  decade  of  the  present  century.  State  after 
state  in  rapid  succession  enacted  workmen's  compensation  laws. 
Constitutional  provisions  in  some  jurisdictions  imposed  limitations 
and  obstacles,  and  in  particular  stood  in  the  way  of  an  absolute  and 
unconditional  requirement  of  compensation.  Among  the  forces 
that  stood  in  the  way  of  uniform  and  unconditional  provision  there 
was  also  the  clinging  by  the  workmen  themselves  to  the  option  for 
suing  their  employers  for  damages,  with  its  delusive  possibility  of 
a  heavy  jury  award.  Different  systems  were  adopted  in  different 
states;  and  not  infrequently  the  compensation  was  inadequate  as 
well  as  lacking  in  certainty.  Usually  the  same  method  was  fol- 
lowed as  in  Great  Britain  and  France :  the  burden  of  compensating 
the  workmen  was  put  on  the  employer  once  for  all,  but  some  free- 
dom was  left  him  as  regards  the  manner  in  which  the  provision 
should  be  made.  In  many  jurisdictions  he  was  given  an  option 
of  insuring  either  in  a  private  employers'  liability  company  or  in  a 
cooperative  ("  mutual ")  insurance  company  controlled  by  the  state 
and  competing  with  the  private  companies.  There  were  instances 
(as  in  California)  of  an  all-inclusive  compulsory  organization  man- 
aged directly  by  the  state.  It  was  not  until  1916  that  the  federal 
government  enacted  an  adequate  law  covering  employees  under  its 
jurisdiction.  The  rapid  spread  of  the  reform  is  significant:  it 
shows  how,  even  in  a  conservatively-minded  community  like  ours, 
a  gathering  and  cumulative  public  opinion  brings  about,  when  once 
a  first  step  sets  the  example,  the  rapid  adoption  of  measures  long 
deemed  impracticable. 

The  other  phases  of  workmen's  insurance  present  more  complex 
problems.  Old-age  pensions,  on  a  non-contributory  basis,  come 
next  after  provision  against  accident  in  ease  and  simplicity.  But  if 
put  on  a  contributory  basis  —  which  in  principle  is  preferable  — 
they  involve  the  collection  of  premiums  over  many  years,  the 
investment  of  large  funds,  elaborate  records,  provisions  for  cases 


364  PROBLEMS  OF  LABOR  [60-§6 

of  changed  domicile  and  occupation.  The  administrative  problems 
are  highly  complex  in  the  case  of  sick  insm-ance  also.  A  compul- 
sory and  universal  system,  with  its  need  of  registration,  of  elaborate 
checks,  of  medical  attendance  and  supervision,  presumably  of 
contributions  from  employees,  can  be  set  up  only  by  well- 
devised  legislation,  and  can  be  effective  only  under  administra- 
tion at  once  stringent  and  humane.  In  the  field  of  social  reform, 
as  in  so  many  others,  these  difficulties  are  especially  serious  in  the 
United  States.  The  national  government  is  limited  in  its  consti- 
tutional power.  The  states  can  never  act  in  unison,  and  are  often 
deterred  from  proceeding  separately  by  mutual  fears  and  jealousies. 
Their  large  and  cumbrous  legislatures,  elected  for  short  terms,  do 
not  easily  frame  careful  and  consistent  laws.  The  absence  of  per- 
manent tenure  in  the  upper  administrative  service  causes  a  lack  of 
trained  officials.  All  this  will  doubtless  change  gradually  for  the 
better,  and  the  conditions  will  become  more  favorable  for  the  as- 
sumption by  the  state  of  larger  and  more  diiEcult  undertakings. 
Among  such  is  a  far-reaching  system  of  provision  against  sickness 
and  old  age;  concerning  whose  future  in  this  country  it  would  be 
hazardous  to  predict  more  than  that  in  some  form  it  is  tolerably 
certain  to  come  sooner  or  later. 

§  6.  Unemployment  presents  problems  even  more  difficult  than 
accident,  old  age,  and  sickness. 

Socialists  like  Marx  and  Rodbertus  contend  that  a  large  reserve 
of  unemployed  workmen  necessarily  comes  into  being  under  the 
capitalist  system.  In  answer,  it  may  be  maintained  that  a  steady 
supply  of  unemployed  laborers  tends  to  bring  its  own  remedies;  it 
brings  a  competition  for  places,  a  bidding  of  laborers  against  la- 
borers, a  readjustment  of  terms  between  employers  and  employees, 
and  the  final  attainment  of  a  stage  of  equilibrium  when  all  will  be 
absorbed  in  industry.  As  a  matter  of  abstract  reasoning,  this  is 
more  consistent  and  logical  than  the  socialist  attempt  to  prove  that 
continuous  unemployment  on  a  large  scale  is  inevitable.  To  put  an 
extreme  case,  if  one  half  or  one  quarter  of  the  total  number  of  la- 
borers were  long  unemployed,  it  is  certain  that  readjustment  would 
take  place,  by  lowered  wages  and  probably  altered  industrial  ar- 


60-§6]         WORKMEN'S  INSURANCE.     POOR  LAWS  365 

rangements;  and  before  long  there  would  be  diminution  of  unem- 
ployment, and  eventually  (supposing  the  process  to  work  out  its 
results  without  cheek  to  the  end)  none  would  be  left. 

All  reasoning  that  attempts  to  show  how  unemployment  tends  to 
bring  its  own  remedy  assumes  settled  conditions  of  industry  —  the 
absence  of  friction  and  transition  and  irregularity.  Such  condi- 
tions never  exist  in  the  actual  world,  and  never  will  exist,  unless 
indeed  under  a  rigid  socialistic  regime.  An  automatic  adjustment 
of  the  supply  of  labor  to  those  conditions  under  which  all  shall  be 
employed,  works  out  in  fact  only  as  a  rough  approximation  or 
tendency;  like  the  tendency  of  imports  to  balance  exports,  of 
prices  to  conform  to  the  quantity  of  money,  of  the  earnings  of  indi- 
viduals to  be  proportioned  to  their  efficiency.  In  the  actual  world 
there  is  but  a  loose  conformity  to  these  long-run  tendencies.  So 
far  as  unemployment  goes,  tho  it  is  true  that,  the  greater  its  extent, 
the  stronger  are  the  forces  which  tend  to  make  it  diminish,  there 
are  abundant  causes  for  its  being  a  continuing  phenomenon.  The 
steady  progress  of  invention  and  improvement  brings  shifts  in  the 
employment  of  labor;  at  any  given  moment  a  certain  proportion  of 
men  are  being  displaced  in  one  industry  and  are  not  yet  absorbed 
in  another.  The  restlessness  of  the  workmen  themselves  —  pro- 
moted as  it  is  by  the  monotony  of  factory  work  —  is  another  cause 
of  shifting.  The  periodic  maladjustments  of  industry  and  the  re- 
currence of  stages  of  depression  are  a  great  and  calamitous  cause 
of  unemployment.  Similar  in  effect,  and  more  continuously  in 
operation,  are  the  seasonal  oscillations.  These  are  sometimes  in- 
evitable, as  in  the  work  of  the  harvests.  Often  they  are  not  inev- 
itable, but  due  to  the  mere  crudeness  of  our  organization  of  pro- 
duction and  exchange.  In  such  industries  as  the  making  of  boots 
and  shoes,  clothing,  straw  hats,  and  the  like,  there  is  no  inherent 
reason  why  the  work  should  not  be  evenly  distributed  thru  the 
year;  yet  in  fact  busy  seasons  are  followed  by  slack,  and  overtime 
work  by  unemployment.  Casual  and  irregular  labor  is  sometimes 
inevitable,  as  in  loading  and  unloading  freight  from  vessels  and 
railways;  and  it  is  frequent  even  where  not  inevitable,  because 
many  employers  are  disposed  to  favor  casual  labor  rather  than  take 


366  PROBLEMS  OF  LABOR  [60- §  6 

the  trouble  of  arranging  for  a  permanent  staff.  So  constantly  are 
these  various  causes  at  work  that  nonemployment  is  an  unceasingly 
recurring  phenomenon,  and  in  that  sense  a  permanent  one. 

Any  method  of  insurance  for  equalizing  the  burden  of  the  irregu- 
larities of  employment  presents  some  obvious  difficulties  of  admin- 
istration. The  irregularities  are  of  a  sort  which  do  not  tend  to 
offset  each  other,  like  the  chances  of  death  and  old  age.  They  are 
therefore  susceptible  of  actuarial  treatment  only  with  a  very  wide 
margin  of  "loading."  That  they  vary  from  occupation  to  occu- 
pation is  not  so  serious  a  difficulty.  Insurance  against  unemploy- 
ment would  doubtless  have  to  be  organized,  like  insurance  against 
accident,  on  the  basis  of  occupations  and  with  differences  of  rates 
according  to  the  varying  risk  of  unemployment. 

All  such  difficulties,  however,  are  slight  in  comparison  with  the 
fundamental  one:  how  prevent  an  unemployment  benefit  from 
demoralizing  the  recipient?  If  all  men  were  eager  in  the  search  for 
work,  relief  in  case  of  unemployment,  whether  by  insurance  or  any 
other  method,  would  be  a  comparatively  simple  matter.  But  for 
most  men,  assured  support  until  a  job  is  found  makes  it  too 
probable  that  the  job  will  not  be  sought. 

One  method  of  insurance  that  has  had  some  promising  results  is 
thru  trade  unions.  The  strong  British  unions  offer  an  out-of-work 
benefit  (not  to  be  confounded  with  their  strike  benefit)  which  has 
been  administered  successfully  and  beneficently  for  many  years. 
It  is  conducted  under  conditions  that  go  far  to  prevent  abuse.  The 
officers  and  other  members  of  the  local  union  know  what  is  the  state 
of  trade  in  their  district,  what  are  the  possibilities  of  employment, 
what  the  spirit  and  habits  of  the  recipient.  They  are  watchful 
against  fraud  upon  the  union  funds.  They  can  not  only  give  out- 
of-work  pay,  but  make  sure  that  all  available  opportunities  for  get- 
ting work  are  utilized,  and  that  benefits  continue  to  be  paid  only  so 
long  as  unemployment  is  inevitable  or  at  a  rate  declining  with  the 
lapse  of  time.  This  mode  of  coping  with  the  problems  has  seemed 
so  promising  that  experiments  have  been  made  toward  utilizing 
it  in  the  assignment  of  unemployed  benefit  by  public  authority.  A 
number  of  cities  in  Belgium  and  elsewhere  have  adopted  the 


60-§6]         WORKMEN'S  INSURANCE.     POOR  LAWS  367 

"  Ghent  system  "  (first  developed  in  that  place  with  apparent  suc- 
cess) of  offering  a  supplement  to  the  trade-union  unemployed  bene- 
fit ;  they  pay  say  1  franc  for  every  1^  francs  allowed  by  the  union. 
Essentially  the  same  system  has  been  adopted  on  a  national  basis 
in  Denmark  and  Norway. 

With  this  enormously  difficult  problem  Great  Britain  grappled 
coiuageously,  almost  adventurously,  in  her  insurance  act  of  1911. 
That  great  measure  provided  not  only  for  an  all-embracing  system 
of  insurance  against  sickness  and  permanent  infirmity,  but  also  for 
a  large  tho  not  uniA'ersal  one  against  unemployment.  Thereby 
Great  Britain  came  to  provide,  like  Germany,  for  sickness  and  dis- 
ability, as  well  as  for  accident  and  old  age;  and  in  this  humane  ri- 
valry took  the  lead  by  providing  for  unemployment  also.  In  certain 
important  occupations  (such,  for  example,  as  building,  the  so-called 
engineering  trades,  shipbuilding)  insurance  against  being  out  of 
work  was  made  compulsory.  Contributions  were  required  in  equal 
amounts  from  employers  and  employees,  the  state  also  adding  a 
share.  A  system  of  labor  exchanges  had  already  been  established 
for  facilitating  the  mobility  of  labor;  it  soon  became  so  extensive 
in  its  operations  as  to  serve  effectively  as  a  test  of  nonemployment. 
Like  the  German  insurance  code,  the  act  of  1911  was  a  remarkable 
piece  of  legislative  workmanship;  while  its  chance  of  successful 
operation  was  immensely  increased,  as  had  been  the  case  in  Ger- 
many, by  the  existence  of  a  trained  permanent  administrative  staff, 
to  which  could  be  allowed  much  discretion  on  details.  An  ex- 
traordinary forward  step  was  taken  in  this  field  of  social  reform. 

Public  relief  works  are  a  tempting  device.  Yet  they  have  proved 
of  service  chiefly  as  safeguards  against  imposture;  and  for  the  latter 
purpose  they  are  of  uncertain  effect  —  they  sometimes  cause  im- 
posture. It  is  remarkable  testimony  to  the  general  effectiveness 
of  the  regime  of  private  industry  and  to  the  extreme  difficulty  of 
finding  a  substitute  for  the  spur  of  pecuniary  interest,  that  relief 
works  have  rarely  been  successful  in  putting  any  considerable  num- 
ber of  deserving  unemployed  at  work  on  something  really  worth 
while,  and  have  never  been  successful  in  achieving  this  result  for 
all  the  deserving  unemployed.     It  is  easy  to  declare  that,  at  a  given 


368  PROBLEMS  OF  LABOR  [60-§6 

juncture,  there  are  both  unemployed  laborers,  and  needs  to  be  satis- 
fied for  the  community  by  the  labor  of  somebody.  To  bring  these 
two  together,  and  set  the  men  to  work  on  things  they  can  do  and  on 
which  their  labor  tells  to  full  advantage,  is  the  most  difficult  task  a 
public  official  can  be  confronted  with.  Both  the  public  employer 
and  the  aided  employee  almost  always  feel  it  to  be  perfunctory. 
Only  where  the  simplest  and  most  monotonous  of  tasks  can  be  as- 
signed —  as  wood  sawing  or  stone  breaking  —  is  it  possible  to  pro- 
vide work  for  the  unemployed  and  hold  them  to  a  fixed  stint.  Very 
little  work  of  real  utility  can  be  laid  out  in  this  mechanical  way. 
Most  things  worth  doing  are  more  complex.  It  is  difficult  at  best 
to  find  work  that  is  thoroly  worth  doing;  it  is  even  more  difficult  to 
get  it  efficiently  done  by  relief  operations.  For  one  thing,  the 
power  of  discharge  is  lacking;  and  it  must  be  sorrowfully  admitted 
that  this  power,  heartless  tho  it  seems  and  subject  to  abuse  as  it  is, 
remains  essential  for  keeping  the  ordinary  laborer  steadily  at  his 
task. 

None  the  less,  public  works  of  a  kind  that  are  certain  to  be  carried 
out  sooner  or  later,  may  best  be  set  going  in  times  when  there  is 
unusual  lack  of  employment.  Some  palliation  for  the  recurring 
stages  of  depression  may  be  found  by  massing  in  such  periods  set- 
tled public  expenditures.  In  a  country  like  Great  Britain,  for  ex- 
ample, the  great  industry  of  shipbuilding  is  especially  subject  to 
those  fluctuations  which,  as  we  have  seen,  are  marked  in  the  indus- 
tries that  make  plant  and  machinery. i  If  the  government  must 
build  men-of-war,  let  it  put  the  shipyards  to  work  on  them  in  those 
times  of  depression  when  the  demand  for  merchant  shipping  is  at  a 
standstill.  Similarly,  a  country  in  which  railways  are  publicly 
managed  may  arrange  for  new  construction  and  extension  at  times 
when  private  investment  is  halting.  This  calls  for  a  firm  hand  in 
checking  the  public  expenditure  as  soon  as  private  undertakings 
.revive.  Many  people,  employers  and  employees,  will  be  certain  to 
clamor  for  indefinite  continuance.  Even  when  prudently  man- 
aged, this  is  an  uncertain  device,  subject  to  the  dangers  of  perfunc- 
tory public  works.  Nevertheless,  it  is  better  than  the  common  pro- 
1  See  Chapter  28,  §  2. 


()0-§7]         WORKMEN'S  INSURANCE.     POOR  LAWS  369 

cedure  of  letting  the  rush  of  speculative  activity  reach  public  oper- 
ations also,  thus  exaggerating  both  the  upward  swing  and  the  sub- 
sequent recoil. 

Arrangements  for  spreading  information  and  increasing  the 
mobility  of  laborers  are  good  without  qualification.  Much  more 
can  probably  be  done  in  this  way  by  public  authority  than  has  yet 
been  accomplished.  Private  agencies  are  subject  to  great  abuses. 
They  find  the  laborer  when  he  is  least  capable  of  holding  out  and 
bargaining,  and  when  it  is  most  easy  to  take  advantage  of  his  weak- 
ness and  ignorance.  Something,  too,  can  probably  be  done  in 
systematizing  the  distribution  of  seasonal  and  casual  labor  — 
dock  and  railway  labor,  harvest  hands,  men  engaged  in  construc- 
tion work,  Germany  and  England  are  now  experimenting  on  a 
large  scale  with  labor  exchanges;  and  some  of  om'  states  are  also 
conducting  public  employment  bureaus.  Here,  again,  the  social 
ferment  is  at  work,  and  the  problem  is  grappled  with  as  never  be- 
fore. To  achieve  good  results  in  bringing  unemployed  labor  to  the 
places  where  it  is  wanted,  and  to  systematize  casual  labor,  officials 
must  be  put  in  charge  who  are  capable,  well-trained,  and  high- 
minded.  Such  men  are  wanted  in  every  direction  where  the  sphere 
of  public  activity  is  enlarging;  and  the  success  of  all  work  for  social 
betterment,  most  of  all  perhaps  of  work  for  relieving  the  poor  and 
unfortunate,  depends  on  success  in  selecting  and  permanently  re- 
taining administrators  of  the  right  stamp. 

§  7.  No  phase  of  social  endeavor  illustrates  more  clearlj'-  the  con- 
flict between  sympathy  and  sober  judgment  than  the  poor  law. 
Some  provision  for  the  relief  of  the  indigent  there  will  always  have 
to  be.  The  altruistic  impulse  will  not  permit  the  very  last  stage 
of  misery  to  be  reached.  The  various  schemes  considered  in  the 
preceding  paragraphs,  even  tho  carried  to  their  fullest  possibilities, 
will  yet  leave  untouched  cases  of  misfortune,  improvidence,  wreck- 
age. There  will  always  be  occasion  for  simple  charity;  and  charity 
always  runs  the  danger  of  demoralizing  the  recipient. 

Some  sorts  of  relief  can  be  given  without  danger  of  harming 
character.  The  pauper  insane  were  formerly  cared  for  in  local  alms- 
houses, often  under  wretched  conditions.    The  better  way  is  to 


370  PROBLEMS  OF  LABOR  [60-§7 

take  care  of  them  with  reasonable  comfort  in  special  asylums,  ad- 
ministered not  by  local  bodies  but  by  the  central  government,  with 
skilled  supervision.  The  feeble-minded,  the  blind,  the  crippled 
and  deformed,  those  incurably  ill,  can  be  mercifully  segregated 
in  the  same  way,  and  with  the  same  certainty  that  no  one  will  be 
tempted  to  make  himself  an  object  for  this  sort  of  charity.  It  is 
doubtless  true  that  much  money  and  effort  is  devoted  to  these  dis- 
tressing cases  which  might  be  turned  with  better  results  to  work  of 
prevention,  not  of  palliation.  Schools  are  more  effective  agencies 
for  upbuilding  than  hospitals.  But  the  appeal  for  aid  to  the  sick 
and  wretched  and  maimed  is  not  to  be  resisted ;  and  it  is  at  least  to 
be  said  of  hospitals  and  asylums  that  suffering  can  be  relieved  in 
them  without  sowing  the  seeds  for  still  more  suffering. 

Old-age  pensions,  when  they  are  really  pensions  and  are  re- 
stricted to  persons  in  need,  are  virtually  a  form  of  poor  relief. 
They  simply  go  by  the  name  of  pensions,  administered  without  the 
repellent  apparatus  of  the  poor  laws.  Whether  they  can  be  made 
respectable  and  even  agreeable  in  this  way  without  undermining 
thrift,  has  already  been  considered.  The  balance  of  probability 
seems  to  be  that  here,  as  in  the  case  of  child  saving,  the  altruistic 
impulse  may  be  allowed  its  way. 

The  case  is  different  with  able-bodied  adults.  Poor  laws,  as 
regards  these  adults,  are  the  most  dangerous  of  well-meant  devices. 
The  certainty  of  support  is  the  greatest  enemy  to  vigor  and  inde- 
pendence. The  history  of  the  English  poor  law  in  the  first  third 
of  the  nineteenth  century  shows  how  an  entire  stratum  of  the  popu- 
lation (in  that  case,  more  especially  the  agricultural  laborers)  can 
be  demoralized  by  indiscriminate  poor  relief.  While  the  only  sure 
safeguard  against  pauperization  is  a  general  feeling  of  shame  at  be- 
coming a  recipient  of  relief,  such  a  public  opinion  is  itself  largely 
the  result  of  the  proper  administration  of  relief. 

The  English  poor  law  investigators  of  1832-1834,  after  surveying 
the  experience  of  their  country  prior  to  the  great  reform  of  that 
date,  came  to  the  conclusion  that  the  only  safe  way  to  administer 
poor  relief  for  the  able-bodied  was  to  concentrate  it  in  workhouses 
or  almshouses.     Outdoor  relief  (that  is,  relief  outside  the  alms- 


60-§7]         WORKMEN'S  INSURANCE.     POOR  LAWS  371 

house)  was  to  be  abolished.  The  principle  was  sound:  let  relief  be 
made  effective  but  not  attractive.  For  generations  the  abolition 
of  outdoor  aid  was  regarded  by  the  English  as  the  only  feasible 
method  of  carrying  out  the  principle.  It  was  thought  the  sine 
qua  non  of  successful  poor  law  administration.  Such  relief  in  fact 
never  disappeared  in  England,  even  for  the  able-bodied.  Further 
experience  and  reflection  have  made  it  less  certain  that  it  ought  to 
be  completely  done  aw^ay  with.  The  workhouse  itself  is  often  a 
school  of  demoralization,  and  relief  in  it,  expected  to  be  so  un- 
attractive, ceases  with  habituation  to  be  so.  The  keynote  of 
modern  charity  administration  is  differentiation  in  the  treatment 
of  the  various  kinds  of  needy  persons.  Outdoor  relief  is  admitted 
to  be  a  highly  dangerous  remedy,  better  discarded  entirely  than 
used  freely.  Yet,  with  due  caution,  and  especially  as  a  means  of 
tiding  over  temporary  straits,  it  serves  better  than  an  inflexible 
almshouse  test.  Again,  indoor  relief,  i.e.  institutional  care,  should 
be  of  various  kinds,  different  for  the  young  and  old,  the  sick  and  the 
well,  the  habitual  vagrant  and  the  workman  temporarily  in  need. 
The  complex  problems  of  charity  administration,  themselves  the 
subject  of  a  large  literature,  are  similar  to  those  of  workmen's  in- 
surance and  the  other  phases  of  social  reform.  They  show  the 
widening  influence  of  altruism  and  at  the  same  time  the  search  for 
rigorous  and  far-sighted  method.  Thru  all  runs  the  same  funda- 
mental principle:  aid  the  weak  in  such  a  way  as  to  strengthen 
them  permanently. 


CHAPTER  61 
Cooperation 

Section  1.  Cooperation  attempts  to  dispense  with  the  business  man.  Its 
various  forms,  372  —  Sec.  2.  Cooperation  in  retail  trading,  when  done 
by  the  well-to-do,  of  no  social  significance.  When  done  by  workingmen, 
as  in  Great  Britain,  it  has  larger  effects.  Methods  of  the  workingmen's 
stores  and  causes  of  their  success.  The  movement  elsewhere,  373  — 
Sec.  3.  Credit  cooperation  in  Germany;  its  methods  and  results.  Other 
sorts  of  societies,  and  development  in  other  countries,  378  —  Sec.  4. 
Cooperation  in  production  would  most  affect  the  social  structure,  but  has 
had  the  least  development.  Causes  of  failure;  the  rarity  of  the  business 
qualities  and  the  limitations  of  workingmen.  The  future  of  coopera- 
tion, 381. 

§  1.  Cooperation  among  manual  laborers  was  long  regarded  as 
the  most  promising  means  of  reaching  better  social  conditions. 
The  prospects  of  far-reaching  change  by  this  method  seem  less  good 
now  than  they  did  to  the  economists  of  a  generation  ago.  The  co- 
operative movement,  none  the  less,  remains  an  important  one,  not 
only  because  of  its  extent  and  its  substantial  results,  but  also 
because  experience  with  cooperation  is  instructive  concerning  the 
place  of  the  business  man  and  of  business  profits  in  modern 
industry. 

The  essence  of  cooperation  is  getting  rid  of  the  managing  em- 
ployer. Laborers,  or  indeed  any  set  of  persons  whether  laborers 
or  not,  do  for  themselves  that  work  of  planning  and  direction  which 
is  ordinarily  done  by  the  business  man.  They  not  only  do  his 
work;  they  also  assume  his  risks.  There  must  be  in  any  case  su- 
perintendence and  administration;  these  are  delegated  partly  to 
salaried  agents,  in  part  are  undertaken  by  committees  or  officers 
serving  gratuitously.  The  cooperators  as  a  body  settle  the  general 
policy  and  assume  the  risks  of  the  undertaking,  just  as  the  stock- 
holders do  in  a  joint-stock  company.  In  this  last-named  way, 
they  aim  to  supplant  the  business  man  in  his  most  important  and 

characteristic  function. 

372 


61-§2]  COOPERATION  373 

Cooperation  has  been  tried  in  retail  trade,  in  credit  and  banking 
operations,  in  some  phases  of  agricultural  work,  and  finally  in 
"production."  This  enumeration  proceeds  roughly  in  the  order 
of  success:  cooperation  has  been  most  successful  in  retail  trade, 
least  so  in  production.  What  has  been  the  degree  of  success  in 
these  several  directions,  and  what  the  explanation  of  the  differ- 
ences? 

§  2.  Cooperation  in  retail  trade,  or  distributive  cooperation,  is 
the  simplest  as  well  as  the  most  successful  form.  A  number  of 
persons,  workmen  or  others,  get  together,  subscribe  a  fund,  buy 
their  commodities  at  wholesale,  and  distribute  these  among  them- 
selves. Simple  as  this  is  in  outline,  the  business  of  retailing  has 
its  complexities.  Goods  must  be  on  hand  in  convenient  quantities, 
with  due  variety,  easily  found  for  the  customer;  those  that  become 
obsolete  or  shopworn  must  not  be  allowed  to  accumulate;  the  pref- 
erences and  whims  of  purchasers  must  be  humored.  The  co- 
operative stores  have  found  that  they  must  assume  the  outward 
appearance  of  the  ordinary  retail  shop,  with  its  show  windows  and 
placards,  decorations  and  temptations.  At  one  time  in  the  his- 
tory of  distributive  cooperation  in  England,  it  was  thought  pos- 
sible to  save  rent  by  taking  premises  on  a  back  street.  But  it  has 
been  found  advisable  to  do  as  the  private  trader  does  —  take 
conspicuous  premises  on  the  main  thorofares.  Thus  only  can  the 
purchasers  be  effectively  reached,  and  shopkeeping  conducted  on  a 
large  scale  and  with  real  economy.  Site  rent,  in  other  words,  has 
been  found  to  be  not  a  cause  of  high  price,  but  a  result  of  efficient 
operation;  and  low  rent  has  not  been  found  to  mean  a  real  saving. 

Where  this  sort  of  thing  is  done  by  persons  of  the  well-to-do  or 
middle  class,  it  has  no  considerable  social  interest.  As  regards 
the  larger  questions  of  social  reform,  there  is  little  difference 
whether  a  shopkeeper  makes  his  profits  or  a  body  of  cooperators 
save  a  bit  by  substituting  for  him  salaried  agents.  This  is  all  that 
is  meant  by  such  great  cooperative  stores  as  the  London  Army 
and  Navy  Stores,  the  Civil  Service  Supply  Association,  and  others. 
These  excellent  institutions  owe  their  success  in  large  degree  to  their 
requirement  of  cash  payments.     The  traditional  relations  between 


374  PROBLEMS  OF  LABOR  [61- §2 

the  ordinary  English  tradesman  and  his  well-to-do  customers  had 
long  been,  and  indeed  still  are,  those  of  servility  combined  with 
high  charges  on  the  tradesman's  side,  and  of  delayed  and  irregular 
payment  on  the  customer's  side  combined  with  affected  indifference 
to  the  prices.  Long  credits,  bad  debts,  high  prices,  and  large 
advance  of  retailer's  selling  price  over  his  buying  price  had  been  the 
natural  consequence  of  this  pseudo-aristocratic  regime.  The 
cooperators,  by  agreeing  to  pay  cash,  made  possible  much  more 
businesslike  methods  and  considerable  economies  as  to  bad  debts 
and  interest. 

In  the  working-men's  stores,  however,  cooperation  has  meant 
something  more.  These  stores  had  a  remarkable  growth  in  the 
half  century  which  elapsed  since  the  first  small  start  about  1850. 
They  now  number  thousands,  their  members  number  hundreds  of 
thousands,  their  transactions  run  into  hundreds  of  millions  of 
dollars.  Their  influence  reaches  the  daily  lives  of  a  very  large 
portion  —  perhaps  one  half  —  of  the  working  population  of  Great 
Britain,  especially  in  the  manufacturing  regions  of  the  North  of 
England  and  Scotland.  Their  example  has  been  followed  on  a  large 
scale  on  the  Continent,  and  has  not  been  without  its  influence  in  the 
United  States. 

A  type  of  the  workingmen's  store  is  the  Rochdale  Equitable  Pio- 
neers' Society,  the  earliest  and  the  most  famous  of  them.  The 
Rochdale  stores,  as  the  workingmen's  stores  of  this  type  have  come 
to  be  called,  sell  at  ordinary  or  current  retail  prices.  They  make  no 
attempt  to  effect  a  saving  at  this  first  step.  Periodically,  say  at 
the  end  of  each  quarter,  they  divide  profits  among  their  members 
in  proportion  to  purchases  made  by  these.  The  system  necessarily 
involves  keeping  account  of  the  purchases;  a  somewhat  trouble- 
some process,  in  which  the  British  stores  enlist  the  aid  of  the  mem- 
bers themselves.  Tin  tags  (or,  in  very  recent  times,  paper  or 
cardboard  slips)  are  given  to  members  for  the  amount  of  every 
purchase,  and  these  memoranda  are  turned  in  by  them  at  the 
close  of  the  quarter  in  order  to  make  up  a  record  of  each  in- 
dividual's purchases. 

This  practise  of  postponing  and  lumping  the  savings  has  two 


61-§  2]  COOPERATION  375 

advantages.  It  has  a  clear  financial  advantage :  the  gains  are  not 
divided  before  they  are  made.  Where  the  attempt  is  made  to  sell 
at  once  at  lowered  prices,  the  mark  may  be  overshot  thru  failm'e  to 
make  enough  allowance  for  expenses,  depreciation,  and  the  like. 
Then,  as  has  happened  with  many  cooperative  experiments,  the  en- 
terprise eventually  goes  to  pieces.  But  the  Rochdale  plan  has  a 
much  more  important  advantage  than  this  financial  safeguard. 
The  rills  of  gain  on  the  several  purchases,  swollen  at  the  end  of  the 
quarter  to  an  appreciable  volume,  are  not  so  likely  to  be  dissipated. 
The  chance  is  greater  that  they  will  be  put  by  and  saved.  i\.nd  the 
stores  themselves  offer  an  opportunity  and  even  temptation  for 
saving.  The  dividends,  as  the  accumulated  profits  are  called, 
may  be  left  at  the  store  as  capital,  and  when  so  left  are  entitled 
to  interest.  At  the  very  outset  the  store  needs  some  capital,  which 
is  subscribed  by  the  members  (usually  in  modest  sums,  the  share 
for  each  member  being  £1).  The  dividends,  largely  left  at  the 
store,  add  to  the  capital.  It  is  in  this  way  that  the  capital  of  the 
workingmen's  stores,  small  at  the  start,  has  been  brought  to  great 
dimensions.  The  stores  not  only  make  savings;  they  act  also  as 
savings  banks. 

This  insinuating  arrangement  for  thrift  is  intentional.  The 
Rochdale  stores  have  always  regarded  themselves  as  something 
more  than  storekeepers  and  penny  savers.  The  early  promoters 
and  spokesmen  of  the  movement  were  men  of  noble  spirit,  and 
looked  on  the  cooperative  store  as  the  first  stage  in  a  great  working- 
men's  movement.  The  expectations  which  they  and  their  con- 
temporaries cherished  have  somewhat  abated  in  later  days;  but 
there  is  still  an  atmosphere  of  high-minded  endeavor.  Thus  the 
stores  almost  invariably  refuse  to  sell  liquor,  tho  this  might  be  a 
source  of  larger  profit.  They  make  it  easy  for  non-members  to  join. 
Strictly,  members  alone  are  entitled  to  share  in  the  dividends.  But 
non-members  are  often  allowed  half  dividends  on  their  purchases, 
the  amounts  so  allowed  being  credited  as  installments  of  subscrip- 
tions to  shares  until  the  full  share  is  paid  for  and  complete  mem- 
bership so  secured.  Substantial  sums  from  their  profits  are  some- 
times allotted  for  educational  purposes  and  the  like.   At  the  annual 


376  PROBLEMS  OF  LABOR  [61-§2 

meetings,  especially  those  of  the  general  cooperative  congress,  the 
cause  of  cooperation  and  workmen's  independence  gets  encourage- 
ment and  laudation ;  sometimes,  no  doubt,  in  empty  phrases,  yet  in 
the  main  with  a  real  spirit  of  social  sympathy. 

The  causes  of  the  remarkable  success  of  this  form  of  cooperation 
in  Great  Britain  are  several.  Not  least  among  them  are  the  gen- 
eral influences  which  brought  about  the  great  progress  of  the  Brit- 
ish working  classes,  and  especially  the  upper  tier  of  skilled  work- 
men, during  the  second  half  of  the  nineteenth  century.  In  this 
progress  the  trade  unions,  the  friendly  societies,  the  cooperative 
stores  played  their  several  parts;  while  the  march  of  industrial  im- 
provement under  capitalist  leadership  sustained  it  all.  The  re- 
quirement of  cash  payments  has  been  an  important  advantage  to 
the  stores ;  another  has  been  the  essential  weakness  of  their  for- 
mer competitors,  the  petty  retail  shops.  No  part  of  the  mechan- 
ism of  the  division  of  labor  is  so  inefficient  as  that  of  ordinary  retail 
trading  on  a  small  scale.  At  the  same  time  ignorance,  gullibility, 
and  shiftlessness  enable  this  sort  of  wasteful  business  to  hold  its  own 
with  singular  persistence.  The  cooperative  store  means  a  resolute 
effort  to  eliminate  as  much  as  possible  of  the  waste.  As  with  most 
improvements,  the  initiation  of  this  one  in  Great  Britain  was  due 
to  the  energy  and  abilitj^  of  a  few  individuals  —  picked  men  among 
the  working  classes  —  who  devised  and  perfected  the  system. 
That  system  once  in  working  order,  it  was  comparatively  easy  for 
others  to  imitate;  just  as  there  are  always  plenty  of  business  men 
who  can  follow  the  new  paths  opened  by  the  real  leaders  of  industry. 

The  success  of  the  British  cooperative  store  illustrates,  too,  the 
difficulty  of  getting  rid  of  accustomed  industrial  ways,  bad  tho  they 
may  be.  Abstractly  considered,  it  might  be  supposed  that  an  en- 
terprising set  of  retail  traders  could  have  pushed  out  the  wasteful 
petty  shop,  by  doing  business  on  a  large  scale,  on  a  cash  basis  and 
at  lowered  prices.  Some  displacement  of  this  sort  has  in  fact  oc- 
curred in  the  United  States,  where  the  bonds  of  custom  are  more 
easily  shaken  off.  In  Great  Britain  and  on  the  continent  of  Europe 
habits  change  less  easily.  It  required  the  entirely  new  method  of 
cooperation,  with  its  appeal  not  only  to  the  purse  of  the  working- 


61-§  2]  COOPERATION  377 

men  but  to  their  sense  of  solidarity,  to  bring  about  a  more  rational 
and  economical  organization  of  retail  trade. 

For  many  years,  the  cooperative  store  movement  in  Great  Bri- 
tain has  been  so  strong  as  to  go  on  largely  by  its  own  impetus,  yet 
possibly  with  something  of  artificial  stimulation.  The  traditional 
rate  of  dividend  on  purchases  (something  like  10  per  cent  —  on  the 
average,  2^  in  the  pound)  has  probably  been  maintained  in 
part  by  keeping  prices  high,  and  not  solely  by  continued  saving 
as  compared  with  current  retail  practises  and  prices.  The  cooper- 
ators  seem  willing  to  pay  a  little  more  in  order  to  get  their  accus- 
tomed dividend.  However  this  may  be,  the  cooperative  stores  are 
an  established  and  important  element  in  the  industrial  system  of 
Great  Britain.  They  have  done  much  to  promote  the  material 
welfare  of  the  workingmen,  and  somethinf^  to  train  them  in 
ways  of  common  action. 

On  the  continent  of  Europe  there  has  also  been  a  considerable 
development  of  distributive  cooperation.  As  in  Great  Britain,  it 
has  been  partly  middle  class,  and  so  uninteresting,  partly  work- 
ing class,  and  so  more  significant.  The  greatest  growth  of  the 
workingmen's  stores  has  been  in  Germany  and  Belgium,  where  the 
movement  has  been  closely  allied  with  that  for  socialism ;  altho,  as 
will  presently  be  shown,  the  cooperative  and  socialistic  ideals  difi^er 
in  essential  points.  The  opportunity  for  displacing  wasteful  retail 
trading  seems  no  less  on  the  Continent  than  in  England.  If  as  yet 
it  has  on  the  whole  been  much  less  availed  of,  the  explanation 
probably  is  that  the  workingmen  of  the  Continent  have  felt  only 
in  very  recent  years  the  stir  which  roused  the  English  half  a  cen- 
tur}^  earlier.  The  progress  of  this  labor  movement,  as  of  others, 
has  of  late  been  rapid. 

In  the  United  States  distributive  cooperation  has  never  had  the 
same  sort  of  growth  or  importance.  There  have  been  many  at- 
tempts, and  some  successful  experiments ;  but  nothing  of  any  large 
consequence.  The  lack  of  growth  in  this  country  is  due  to  various 
causes.  Greater  mobility  of  population,  both  within  cities  and 
between  separate  regions,  is  an  obstacle.  The  comparative  ease  with 
which  capable  persons  rise  in  the  social  and  industrial  scale  often 


378  PROBLEMS  OF  LABOR  [61-§3 

deprives  cooperators,  as  it  does  trade-unionists,  of  possible  leaders. 
Greater  prosperity  and  larger  earnings  cause  indifference  to  small 
savings.  And  finally,  retail  shopkeeping  is  usually  conducted  with 
fair  efficiency.  The  occupation  is  not  under  a  ban  of  social  depre- 
ciation, as  it  has  so  long  been  in  older  countries,  and  therefore  it 
attracts  more  readily  men  of  ambition  and  capacity.  In  the  urban 
centers  much  of  it  is  carried  on  with  more  than  fair  efficiency.  The 
large  shop  and  the  department  store  have  nowhere  been  carried  to 
so  high  a  pitch  as  in  the  United  States.  None  the  less,  a  great  deal 
of  petty  and  wasteful  shopkeeping  remains.  For  the  working 
classes,  the  small  retail  rader  often  is  half  a  friend  in  need,  half  a 
swindler  and  parasite.  There  is  opportunity  for  a  declaration  of  in- 
dependence; but  the  ways  and  habits  of  the  people  seem  not  to 
favor  independence  by  the  method  of  cooperation.  It  is  striking 
that  the  really  successful  workmen's  stores  in  the  United  States 
(not  many  in  any  case)  usually  have  a  membership  made  up  of  the 
newly  arrived  and  still  clannish  immigrants. 

§  3.  In  some  other  districts  there  has  been  a  development  of 
cooperation  not  less  striking  than  that  in  retail  trading. 

In  cooperation  for  securing  better  credit  facilities,  the  Germans 
have  taken  the  lead.  The  name  of  Schulze-Delitzsch  is  associated 
with  this  movement  in  Germany,  as  the  name  of  the  Rochdale  Pio- 
neers is  with  the  stores  in  England.  Schulze,  a  native  of  the  town 
of  Delitzsch,  conceived  the  plan  of  uniting  groups  of  tradesmen  and 
artisans  for  getting  small  loans  on  better  terms,  and  led  the  way 
with  signal  ability  in  the  development  of  the  plan.  In  essentials 
it  is  simple  enough.  A  knot  of  persons  —  tradesmen,  artisans,  and 
the  like  —  form  a  credit  society,  beginning  by  subscribing  a  small 
Initial  capital.  On  the  strength  of  this,  and  of  their  own  individual 
liability  they  borrow  more  —  two  or  three  times  more.  Schulze 
always  maintained  that  for  these  outside  borrowings  unlimited 
liability  by  each  member  (as  in  a  partnership)  was  essential;  not 
only  because  the  person  lending  to  the  society  thus  had  the  security 
of  being  able  in  case  of  default  to  levy  on  any  and  every  member 
individually,  but  because  this  very  liability  made  the  members  and 
managers  unfailingly  watchful  in  their  dealings  among  themselves. 


61-§  3]  COOPERATION  379 

The  total  sums  got  together,  their  own  and  borrowed,  are  then  lent 
out  to  the  members  in  modest  amounts  at  a  moderate  rate  of  inter- 
est; this  rate  of  interest  being  higher  than  that  at  which  the  loans 
from  outside  are  secured.  Even  tho  higher  in  this  wa}-,  the  rate  to 
members  is  commonly  less  than  they  would  have  to  pay  otherwise. 
And  this  is  the  precise  object  aimed  at  —  to  enable  small  produc- 
ers to  get  the  advances  they  need,  v/ithout  paying  the  high  rates 
of  interest  which  as  individuals  they  would  almost  always  have  to 
face.  By  combining  their  resources  and  their  credit,  and  by  man- 
aging the  loans  among  themselves,  they  are  able  to  borrow  at  mod- 
erate rates.  Knowledge  of  each  others'  capacity  and  probity  is 
important,  and  enables  the  credit  society  to  make  advances  and 
take  apparent  risks  which  no  outsider  would  assume  except  on  bur- 
densome terms.  As  with  the  British  stores,  the  system,  once  estab- 
lished and  perfected,  has  proved  capable  of  wide  development. 
The  societies  number  many  hundreds  (about  900  in  1909),  and  play 
an  important  part  in  Germany.  Some  among  them  are  large  finan- 
cial institutions,  with  members  (i.e.  borrowers)  who  do  business  on 
a  considerable  scale  as  tradesmen,  merchants,  manufacturers. 

Tho  sometimes  used  for  considerable  transactions,  credit  co- 
operation of  this  sort  is  essentially  for  the  small  man.  Its  spread 
and  success  in  Germany  are  largely  due  to  the  fact  that  so  much  of 
small-scale  production  still  persists  in  that  country.  More  or  less 
of  it  persists  in  any  country.  Large-scale  operations,  far  spread 
and  growing  tho  they  are,  have  nowhere  swept  the  field  entirely'. 
In  Germany,  perhaps,  more  than  in  any  other  advanced  country, 
the  artisans  and  small  producers  have  held  their  own,  not  only  thru 
inertia,  but  thru  an  adaptation  to  modern  methods  of  production 
that  has  given  them  real  vitality.  The  Schulze-Delitzsch  societies 
have  done  much  to  maintain  them.  The  unflagging  industry  of 
these  Germans  and  their  content  with  sparse  gains,  have  in  turn 
provided  a  favorable  soil  for  the  credit  cooperation. 

Another  phase  of  the  same  general  movement  in  Germany  is 
associated  with  the  name  of  Raiffeisen,  who  also  was  a  leader  in 
developing  an  effective  scheme.  Raiffeisen  societies  are  chiefly 
agricultural  and  serve  the  needs  of  the  great  class  of  peasant  pro- 


380  PROBLEMS  OF  LABOR  [61-§3 

prietors  in  southern  and  western  Germany.  Their  organization 
is  similar  to  that  of  the  Schulze-Dehtzsch  societies,  which  are  com- 
monly urban  or  semi-urban.  Some  capital  is  subscribed  by  mem- 
bers; more  is  got  outside  (sometimes  with  government  aid).  The 
loans  to  members  are  for  longer  periods  than  in  the  urban  societies, 
as  is  necessary  if  they  are  to  be  of  real  service  to  agricultural  pro- 
ducers. Their  spread  has  been  extraordinary;  there  are  thousands 
of  societies,  and  probably  one  half  the  smaller  agricultural  propri- 
etors of  Germany  are  enrolled  as  members.  Each  society  has  com- 
paratively few  members,  and  covers  a  limited  region;  the  essence  of 
success  is  neighborly  knowledge  and  supervision. 

Other  sorts  of  societies  flourish  in  Germany  —  societies  for  the 
purchase  of  materials,  for  the  sale  of  products,  for  the  purchase  and 
use  of  machinery  too  expensive  for  any  one  member.  The  credit 
societies,  as  well  as  these,  have  spread  into  other  countries.  Credit 
cooperation  has  had  a  large  development  in  Italy,  where  also  it  has 
proved  to  meet  the  needs  of  the  class  of  small  tradesmen  and  arti- 
sans; and  it  has  spread  similarly  among  the  agricultural  classes  of 
northern  Italy.  It  is  odd,  and  not  readily  explained,  that  in  France 
no  one  of  these  forms  of  cooperation  —  whether  in  storekeeping, 
for  credit,  or  for  other  analogous  ends  —  has  had  any  considerable 
growth. 

A  striking  advance  has  been  made  in  Denmark,  and  to  some 
extent  in  other  Scandinavian  countries  —  cooperation  among 
agricultural  producers,  in  collecting  milk  and  making  butter,  curing 
bacon,  packing  and  shipping  eggs.  A  large  export  trade,  especially 
to  England,  has  been  built  up  on  a  basis  of  cooperative  effort.  The 
English  naturally  look  on  this  achievement  with  envy,  and  wish 
that  their  own  agricultural  producers  might  adopt  the  same 
methods  with  the  same  success.  But  for  success  of  this  sort  a  sys- 
tem of  land  ownership  in  small  parcels  is  necessary,  or  at  least  one 
of  long-term  tenancy  with  assured  compensation  for  improvements; 
and  not  only  such  an  assured  position,  but  habituation  of  the  culti- 
vators to  it.  The  English  system  of  landowning  and  land  tenure 
constitutes  the  great  obstacle  to  the  spread  of  this  sort  of  coopera- 
tion in  England.     Possibly  in  Ireland,  with  the  ousting  of  the  land- 


61-§  4]  COOPERATION  381 

lord  and  the  transfer  of  the  land  to  the  cultivators,  there  is  a  prom- 
ising field;  and  an  earnest  effort  is  now  being  made  by  the  best 
friends  of  the  Irish  to  teach  them  the  principles  and  practises  of 
agricultural  cooperation. 

§  4.  All  the  schemes  outlined  in  the  preceding  sections  are  for 
partial  cooperation.  They  leave  the  members  independent  in  their 
main  industrial  activities.  Very  different  is  the  case  with  coopera- 
tion in  production.  Here  the  endeavor  is  made  to  get  rid  of  the 
business  man  at  the  vital  place.  Workmen  get  together,  and  pro- 
ciu-e  in  some  way  (by  saving,  borrowing,  public  aid)  an  initial  capi- 
tal. They  possess  their  own  tools  and  plant,  buy  their  materials, 
sell  the  output,  and  divide  among  themselves  the  proceeds.  They 
are  their  own  managers  and  their  own  employers;  and  if  successful 
they  can  secure  business  profits  as  well  as  ordinary  wages,  and, 
not  least,  can  emancipate  themselves  from  the  dependent  position 
of  the  hired  employee. 

Evidently,  if  this  were  done  on  a  large  scale,  social  conditions  and 
the  organization  of  industry  would  be  profoundly  affected.  The 
employing  capitalist  would  disappear.  The  consequent  changes 
would  be  vastly  greater  than  those  from  the  spread  of  the  other 
forms  of  cooperation.  Distributive  cooperation,  if  carried  to  its 
utmost  conceivable  development  (and  it  is  far  from  being  carried 
to  that  stage,  or  likely  to  be)  would  mean  simply  the  displacement 
of  the  retail  shopkeepers  by  a  set  of  salaried  agents.  Cooperation 
in  credit  touches  only  some  fringes  and  loose  ends  of  the  modern 
industrial  s^'stem.  The  various  phases  of  cooperation  in  agricul- 
ture are  designed  to  aid  the  independent  farmer  and  strengthen  his 
position,  not  to  supersede  him.  Productive  cooperation,  however, 
if  carried  out  to  the  full,  v/ould  modify  social  and  industrial  organi- 
zation at  a  crucial  point.  Even  if  applied  not  universally,  but  on 
a  scale  comparable  to  that  of  the  other  forms  —  if  it  could  show 
hundreds  of  societies,  and  with  members  by  the  tens  of  thousands 
or  hundreds  of  thousands  —  its  spread  would  mean  something  of 
high  import  for  the  present  and  future. 

Unfortunately,  cooperation  in  production  hardly  exists;  or,  if  it 
exists,  only  to  such  an  extent  that  the  thing  cannot  be  said  to  be 


382  PROBLEMS  OF  LABOR  [61-§4 

unknown  or  untried.  A  considerable  number  of  experiments  in  it 
have  been  made  in  various  countries.  There  have  been  sporadic 
cases  of  sustained  success.  But  the  record  on  the  whole  is  one  of 
failure. 

This  is  true  even  in  France,  where  the  cases  of  success  are  most 
numerous.  As  was  just  noted,  the  other  forms  of  cooperation  seem 
to  find  no  favorable  field  in  France;  but  at  least  the  disposition  has 
appeared  to  make  trial  of  production  by  united  workmen.  The 
state  has  freely  aided  workmen  in  these  attempts,  by  loans  and  by 
contracts,  from  the  revolution  of  1848  down  to  our  own  time.  State 
aid  is  often  said  to  be  dangerous  to  cooperators;  and  probably  it  is 
true  that  those  cooperators  are  most  likely  to  succeed  who  begin  in 
a  small  way  on  their  own  savings,  and  depend  thruout  on  their  own 
industry  and  efficiency.  Yet  some  societies  aided  by  the  state  in 
France  have  had  a  long  and  successful  career.  The  same  is  true  of 
a  few  societies  that  have  grown  out  of  the  famous  profit-sharing 
experiments.^  The  striking  thing  is  that  whether  aided  by  the  state 
or  not,  whether  started  from  the  beginning  as  productive  societies 
or  the  outgrowth  of  profit  sharing,  they  are  so  few.  There  has  been 
no  lack  of  propaganda,  of  opportunity,  of  support.  The  net  result 
is  as  nothing,  compared  to  industry  in  general,  even  compared  to 
the  growth  of  other  forms  of  cooperation. 

In  other  countries  there  is  the  same  insignificance  of  the  produc- 
tive societies.  In  Great  Britain  a  very  few  have  held  their  own. 
In  recent  years  these  have  been  bolstered  up  by  the  great  distribu- 
tive stores,  which  have  bought  by  preference  some  products  from 
the  producing  cooperators.  This  sort  of  patronage  is  not  neces- 
sarily enfeebling,  any  more  than  is  public  aid.  But  that  it  is  wel- 
comed, or  even  resorted  to,  shows  that  the  prospects  of  indepen- 
dent success  are  not  good.  LTnless  the  cooperators  can  do  so  well 
in  quality  and  price  of  their  goods,  and  in  the  earnings  which  they 
secure  for  themselves,  that  they  call  for  no  favors,  simply  compet- 
ing with  capitalists  on  even  terms,  there  is  no  chance  of  any  large 
development. 

It  is  striking  that  in  Great  Britain  the  cooperative  stores  have 

1  Sec  above,  Chapter  59,  §  1. 


Gl-§  4]  COOPERATION  383 

themselves  entered  in  another  way  on  the  field  of  production.  The 
great  wholesale  societies,  and  some  of  the  individual  retail  societies, 
have  established  factories  and  workshops  of  their  own,  for  making 
shoes,  clothing,  hardware,  biscuits,  jams,  and  pickles;  they  have 
even  tried  tea  planting  in  Ceylon  and  (with  doubtful  success)  farm- 
ing on  their  own  account  in  Great  Britain  and  Ireland.  All  these 
establishments  are  managed  by  superintendents  sent  down  from  the 
cooperative  stores.  The  workmen  in  them  are  hired  in  the  same 
way  and  substantially  on  the  same  terms  as  in  ordinary  private 
establishments.  Obviously,  this  is  a  very  different  thing  from  true 
cooperation  in  production,  where  the  workmen  choose  the  managers 
from  among  their  own  numbers.  The  success  of  the  stores  in  their 
subsidiary  establishments  is  due,  no  doubt,  largely  to  the  fact  that 
they  have  an  assured  market,  and  confine  themselves  to  mal  ing 
staple  goods  by  staple  methods.  None  the  less,  it  is  surprising  that 
the  associated  workmen  should  have  achieved  success  in  manage- 
ment by  this  route,  when  they  have  failed  of  it  by  the  more  direct 
route. 

The  essential  diSiculty  in  the  way  of  cooperation  in  production 
is  that  it  attempts  to  supersede  the  business  man  where  he  is  most 
needed.  Its  failure  is  at  once  a  result  and  a  proof  of  the  rarity  and 
the  importance  of  business  leadership.  Intelligence,  imagination, 
judgment,  courage,  powers  of  organization  and  administration  — 
all  the  qualities  needed  for  success  in  business  management  —  are 
possessed  in  the  right  combination  by  few  individuals.  Coopera- 
tion cannot  dispense  with  these  leaders;  it  w^ould  have  to  enlist 
them.  No  spur  to  the  full  application  of  their  powers  has  been 
found  comparable  to  that  of  individual  ownership  and  individual 
gain.  Individuals  of  high  capacity  are  sometimes  found  at  the 
head  of  cooperative  enterprises,  working  unselfishly  for  the  cause 
and  for  their  fellows.  Such  apparentl}'^  has  been  the  case  in  some 
of  the  great  British  stores.  Such,  too,  has  been  the  case  in  some 
of  the  great  profit-sharing  enterprises.  But  these  are  exceptions. 
Most  men  exercise  their  faculties  to  the  highest  pitch  when  work- 
ing for  themselves  and  their  families.  Possibly  a  substitute  for  the 
driving  force  of  self-interest  may  be  found  in  an  entirely  different 


384  PROBLEMS  OF  LABOR  [61-§4 

organization  of  society;  of  this  more  will  be  said  elsewhere.  Coop- 
eration, put  on  trial  in  the  midst  of  an  individualistic  and 
capitalistic  organization,  has  failed  to  enlist  the  needed  leader- 
ship. 

The  complications  of  modern  industry  make  cooperative  produc- 
tion more  difficult.  Large-scale  operation,  great  plant,  elaborate 
processes,  intensify  the  need  for  managers  of  ability  and  resources. 
Even  in  those  compara^tively  simple  industries  which  are  developed 
little  beyond  the  handicraft  stage  —  and  there  are  not  a  few  such, 
in  various  directions  —  the  cooperative  plan  has  not  been  found 
to  work.  As  with  profit  sharing,  one  might  expect  to  find  a  greater 
degree  of  success  in  these  sorts  of  business;  but  neither  in  profit 
sharing  nor  in  cooperative  production  is  there  any  clear  indication 
from  experience  that  the  character  of  the  industry  makes  a  great 
difference.  Tho  the  cooperators  undertake  an  industry  requiring 
comparatively  small  plant  and  no  elaborate  organization,  and  tho 
they  possess  in  their  own  ranks  the  right  man  —  perhaps  a  hidden 
genius  —  it  is  far  from  certain  that  he  will  be  put  in  charge  by  his 
fellows,  and  kept  in  charge.  There  is  likely  to  be  jealousy,  vacil- 
lation, stagnation;  and  the  industrial  world  is  moving  farther  and 
farther  away  from  the  methods  of  town-meeting  democracy.  The 
capable  man  finally  sets  up  for  himself,  or  enters  the  employ  of 
others  in  an  administrative  post.  If  these  difficulties  are  serious 
in  the  simpler  industries,  they  become  more  and  more  so  with  the 
growing  scale  of  complexity  of  modern  business. 

The  conclusion  both  from  experience  and  from  general  reasoning 
is  that  cooperation  is  not  likely  to  revolutionize  the  social  order. 
It  may  grow  considerably  in  some  of  the  ancillary  operations  al- 
ready carried  on  with  success.  But  the  hopes  entertained  a  gener- 
ation ago  by  many  economists,  that  it  was  only  in  the  first  stages 
of  a  far-reaching  development,  are  now  cherished  by  few.  Other 
ways  of  mitigating  inequality  and  widening  opportunity  have 
come  to  enlist  the  enthusiasm  of  social  reformers  —  labor 
organization,  labor  legislation,  extension  of  public  management 
and  control,  socialism  halfway  or  all  the  way.  To  these  the  future 
seems  to  belong,  not  to  cooperative  methods. 


61-§  4J  COOPERATION  385 

References  on  Book  VI 

General  consideration  of  the  topics  in  tliis  Book  is  in  J.  R.  Commons 
and  J.  B.  Andrews,  Principles  of  Labor  Legislation  (2nd  ed.  1920).  On 
many  problems  there  is  keen  discussion  in  A.  C.  Pigou,  The  Economics  of 
Welfare  (1920).  H.  Herkner,  Die  Arbeiterfrage  (6th  ed.  1920),  syste- 
matically covers  the  field.  On  trade  imions,  the  elaborate  book  by  S.  and 
B.  Webb,  Industrial  Democracy  (2nd  ed.  1920),  is  of  high  quahty;  written 
with  special  regard  to  Enghsh  experience,  and  stating  without  reserve  the 
case  in  fa^^or  of  the  trade  union.  TJw  History  of  Trade-Unionism  (revised 
ed.  1920),  by  the  same  authors,  is  a  classic  in  its  field.  On  the  American 
situation  excellent  studies  on  some  phases  are  in  J.  II.  Hollander  and  G.  E. 
Barnett,  Stxidies  in  American  Trade-Unionism  (1905).  Recent  books  on 
labor  organization  in  the  United  States  are  R.  F.  Hoxie,  Trade  Unionism 
in  the  United  States  (1917),  an  original  and  discriminating  book;  F.  T, 
Carlton,  History  and  Problems  of  Organized  Labor  (1920).  An  excellent 
volume  of  selections  bearing  particularly  on  American  problems  is  by  J. 
R.  Commons  (editor).  Trade  Unionismand  Allied  Problems  (1921).  On  Aus- 
stralasian  experience  see  V.  S.  Clark,  The  Labor  Movement  in  Australasia 
(1906);  and  good  compact  summaries  in  two  Research  Reports,  on  Aus- 
tralia and  New  Zealand,  published  by  the  National  Industrial  Conference 
Board  (1918-19).  On  the  history  of  labor  legislation  in  England,  B.  L. 
Plutcluns  and  A.  Harrison,  A  History  of  Factory  Legislation  (1903).  J. 
Rac,  Eight  Hours  for  Work  (1894),  is  a  good  inquiry  on  experience  to  the 
date  of  its  publication.  On  workingmen's  insurance  and  aUied  topics 
see  H.  R.  Seagcr,  Social  Insurance:  a  Program  of  Social  Reform  (1910), 
brief  and  excellent.  More  detailed  and  more  informational  are  L.  F. 
Frankel  and  M.  Dawson,  Workingmen's  Insurance  in  Europe  (1910);  I. 
Rubin ow,  aSocig^  Insurance  (1913);  W.  H.  Dawson,  Social  Insurance  in 
Germany  (1912).  W.  H.  Beveridge,  Unemployment  (3rd  ed.  1912),  is  at 
once  sympathetic  and  searcliing.  On  profit  sharing  and  kindi'ed  arrange- 
ments, Profit-Sharing  (1918),  edited  by  R.  E.  Heilman,  with  contribu- 
tions from  various  hands.  A  good  general  account  of  the  cooperative 
movement  is  by  C.  R.  Fay,  Cooperation  at  Home  and  Abroad  (2nd  ed. 
1920). 


BOOK  VII 

PROBLEMS  OF  ECONOMIC  ORGANIZATION 


CHAPTER  62 
Railways 

Section  1.  Railways  an  instrument  for  furthering  the  geographical  division 
of  labor.  Corollary  from  this  that  they  are  not  to  the  public  interest 
unless  they  pay,  389  —  See.  2.  Economic  characteristics  of  railways; 
first,  the  great  plant.  Consequent  tendency  to  decreasing  cost.  Hence 
also  frequent  transition  from  financial  failure  to  financial  success,  392  — 
Sec.  3.  The  element  of  joint  cost,  both  as  to  fixed  charges  and  operating 
expenses.  Charging  what  the  traffic  will  bear;  classification  of  freight,  395 
—  Sec.  4.  Justification  of  charging  what  the  traffic  will  bear  hes  in  full 
utihzation  of  the  railway  equipment,  397  —  Sec.  5.  Other  consequences 
of  joint  cost :  flexibility  of  rates,  and  difficulty  of  deciding  what  is  a  reason- 
able rate,  399  —  Sec.  6.  Chaotic  rates  in  the  United  States,  and  con- 
cession to  favored  shippers,  partly  corrupt,  partly  the  result  of  competi- 
tion, 400  —  Sec.  7.  "Rebates"  and  the  grounds  for  prohibiting  them. 
Rate  agreements  and  pools  as  aids  in  preventing  discriminations.  Incon- 
sistency of  our  legislation  on  rebates  and  rate  agreements,  402  —  Sec.  8. 
In  an  industrially  solidified  and  thickly  populated  country  the  principle 
of  joint  cost  becomes  less  important  in  determining  railway  rates:  mo- 
nopoly position  of  railroads  more  important,  404. 

§  1 ,  The  present  Book  is  concerned  with  the  same  fundamental 
problems  as  the  preceding  Book  —  inequality  and  the  ways  of 
mitigating  it.  But  it  considers  the  relation  of  the  state  not  so  much 
to  the  laborer  as  to  the  capitalist  and  employer.  \Miat  need  is 
there,  what  are  the  ways,  of  controlling  private  business  manage- 
ment or  of  supplanting  it? 

The  railway  is  the  most  important  among  industries,  both  as 
regards  its  effects  on  the  economic  structure  at  large  and  as  regards 
its  own  special  problems.  More  than  any  other  single  factor,  the 
railway  brought  about  the  industrial  revolution  of  the  second  half 
of  the  nineteenth  century.  Its  cheapening  of  transportation  im- 
mensely promoted  far-reaching  geographical  division  of  labor, 
large-scale  production,  impending  monopoly,  great  fortunes.  The 
railway  itself  is  a  vast  enterprise,  with  a  tendency  to  monopoly 

389 


390         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [62- §  1 

conditions  in  its  inherent  workings;  it  threatens  in  private  hands 
to  become  an  iviperium  in  imperio:  it  presents  most  m-gently  the 
problems  of  public  control  and  public  ownership. 

Before  entering  on  the  problems  of  public  regulation  or  manage- 
ment, it  is  desirable  to  analyze  some  of  the  economic  characteris- 
tics of  railways,  since  these  matters  must  be  understood  before  the 
larger  and  more  difficult  matters  can  be  intelligently  dealt  with. 

In  its  most  common  aspect  —  as  a  freight  carrier  —  a  railway 
is  simply  an  instrument  by  which  things  are  made  cheaper  because 
transported  from  a  place  where  they  are  made  to  advantage.  Peo- 
ple commonly  forget  that  all  agencies  of  transportation  are  but 
means  of  furthering  the  geographical  division  of  labor.  An  enor- 
mous amount  of  effort  is  given  to  activities  which  are  simply  an- 
cillary —  which  serve  only  to  facilitate  the  more  effective  appor- 
tionment of  the  community's  labor.  The  railways  of  the  United 
States  in  1900  employed  one  person  for  every  twenty-nine  who 
were  gainfully  occupied. ^  This  figure  takes  account  only  of  those 
employed  in  the  current  operation  of  the  roads,  not  of  those  who 
had  worked  on  their  construction ;  and  we  shall  see  presently  that 
the  amount  of  such  previous  work,  as  indicated  by  the  capital  in- 
vestment, is  exceptionally  large.  In  estimating  the  total  of  the 
ancillary  activities,  we  should  have  to  reckon  also  the  millions  of 
teamsters,  merchants,  salesmen,  clerks,  and  so  on  —  an  enormous 
host,  all  engaged  in  the  transfer  of  things  from  places  where  they 
can  be  produced  cheaply  to  other  places  where  their  expense  of  pro- 
duction would  have  been  greater.  No  part  of  this  labor  is  so  effec- 
tive in  promoting  exchange  as  that  of  transportation  by  steam  rail- 
ways. A  comparatively  slight  advantage  in  production,  which  in 
former  days  would  have  been  offset  by  the  expense  of  transporta- 
tion beyond  a  short  distance,  now  suffices  to  concentrate  industry 
in  one  region,  and  to  induce  exchange  on  a  great  scale  between  it 
and  other  regions. 

It  follows  from  this  obvious  but  forgotten  fact  that  a  railway  is 
not  economically  advantageous  to  the  community  unless  it  pays 

1  The  total  number  of  persons  gainfully  occupied  was,  in  round  numbers, 
29,000,000;  the  steam  railways  employed  a  trifle  more  than  1,000,000. 


62-§  1]  RAILWAYS  391 

its  waj''.  This  conclusion  is  not  in  accord  with  a  common  opinion. 
It  is  often  said  that  a  railway  or  other  means  of  transportation  may 
bring  gains  to  the  community  even  tho  it  be  not  profitable  to  its 
owners.  Similarly  it  is  often  argued  that  a  government,  in  operat- 
ing a  railway,  maj^  accept  with  composure  a  financial  loss,  because 
the  people  as  a  whole  have  gained  something  that  offsets  that  loss. 
The  contrary  view  seems  the  just  one.  No  gain  comes  from  carry- 
ing a  thing  from  one  place  to  another  unless  it  can  be  produced  at 
the  first  place  so  much  more  cheaply  that  it  can  afford  the  cost  of 
carriage  to  the  second.  Ability  to  stand  the  transportation  charge 
is  the  test  of  the  utility  of  the  carriage. 

Needless  to  say,  particular  sections  and  particular  individuals 
may  be  benefited  by  transportation  at  less  than  cost.  Early  in  the 
twentieth  century  the  state  of  New  York  engaged  in  a  great  enlarg- 
ment  of  the  Erie  Canal,  at  an  expenditure  of  one  hundred  millions 
or  more;  and  provided  (by  the  hard  and  fast  method  of  constitu- 
tional enactment)  that  no  tolls  should  be  charged  for  the  use  of  the 
canal.  With  the  completion  of  the  canal  it  will  be  as  if  nature  had 
made  a  navigable  river.  Doubtless,  more  traffic  will  go  to  and  thru 
the  city  of  New  York;  the  rent  of  landowners  there  will  swell  still 
further;  some  consumers  will  gain  in  having  goods  cheaper.  But 
it  will  remain  an  open  question  whether  the  labor  which  built  the 
canal  yields  its  full  normal  result  to  the  community.  The  test  of  its 
having  been  worth  while  must  be  whether  canal  tolls,  sufficient  to 
pay  for  the  labor  (and  waiting)  involved,  could  be  borne  by  the 
trafiic.  It  would  be  desirable,  obviously,  to  have  all  transporta- 
tion free,  and  to  have  every  commodity  produced  once  for  all  where 
it  could  be  most  cheaply  produced.  But  so  long  as  transportation 
involves  labor  and  the  use  of  capital,  a  real  advantage  from  ex- 
change is  got  only  if  at  the  point  of  consumption  the  total  cost  can 
be  met,  including  that  of  transportation. 

It  will  sometimes  be  of  advantage  to  open  up  a  new  country  or  a 
new  region,  by  railways  (and  the  argument  applies  equally  to  wagon 
roads,  canals,  steamship  lines)  which  do  not  pay  at  the  outset. 
This  case  is  analogous  to  that  of  protection  for  young  industries. 
Eventually  the  railway  should  pay;  if  the  losses  of  the  early  stage 


392         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [62-§  2 

are  not  recouped,  they  are  definite  losses.  It  follows  that  where 
subsidies  are  given  to  encourage  railway  construction,  they  should 
be  in  the  nature  of  loans,  to  be  reimbursed  when  the  stage  of 
profitable  operation  has  been  reached. 

The  case,  in  other  words,  is  different  from  that  of  industries 
which  yield  utilities  more  directly.  Some  industries  there  are  in 
which  financial  loss  is  consistent  with  public  gain.  A  water  sup- 
ply may  be  managed  by  a  municipality  on  terms  and  methods 
which,  while  involving  a  deficit,  none  the  less  bring  a  real  advan- 
tage to  the  public.  A  superabundant  supply  of  good  water  brings 
hygienic  gains,  as  well  as  other  more  direct  satisfactions,  not 
necessarily  measured  by  the  price  people  are  willing  to  pay.  The 
post  office  also  may  be  administered  with  good  reason  on  non-com- 
mercial principles;  for  the  diffusion  of  intelligence  is  a  boon  not 
measured  by  its  market  value.  The  deficit  which  the  United 
States  incurs  from  its  cheap  carriage  of  books,  periodicals,  and 
newspapers  is  not  necessarily  a  public  loss,  tho  a  similar  deficit  on 
a  parcel  post  for  merchandise  would  be. 

Passenger  traffic  presents  a  somewhat  different  case  from  freight 
traffic.  Some  passenger  traffic  is  much  nearer  the  stage  of  utility 
and  satisfaction  than  freight  traffic.  Most  of  it,  to  be  sure,  like 
freight  traffic,  is  only  a  phase  of  the  division  of  labor;  such  as  the 
constant  going  of  people  to  and  from  their  places  of  work.  Pleas- 
ure traveling  alone  is  a  consumers'  utility.  The  only  serious 
ground  for  managing  passenger  traffic  on  non-commercial  principles 
is  to  be  found  in  a  possible  immobility  of  labor  or  crowding  of  popu- 
lation. It  is  conceivable  that  cheap  fares  under  congested  con- 
ditions may  bring  a  real  social  gain  not  measured  by  what  the  in- 
dividuals are  willing  to  pay. 

§  2.  Railways  have  two  marked  economic  characteristics  — 
not  such  as  to  make  them  in  the  last  analysis  different  in  kind  from 
other  industries,  but  so  great  in  degree  as  to  bring  railway  prob- 
lems into  a  class  almost  of  their  own.  These  characteristics  are, 
first,  the  great  size  of  the  plant;  and  second,  the  fact  that  the  oper- 
ations are  conducted  largely  at  joint  cost.  Both  have  important 
consequences  for  the  problems  of  public  regulation. 


62-§  2]  RAILWAYS  393 

A  railway's  plant  is  large  absolutely;  but,  more  important  for 
the  present  argument,  it  is  also  large  relatively  to  the  current  out- 
put. As  compared  with  the  capital  invested  in  plant,  the  annual 
gross  receipts  (the  measure  of  the  output)  are  but  a  small  fraction 
—  one  fifth  or  one  tenth,  A  manufacturing  plant  in  which  the 
plant  merely  equaled  in  value  the  annual  output  would  be  regarded 
as  having  a  relatively  large  fixed  investment.  How  much  more 
the  railway,  in  which  the  plant  is  five  or  ten  times  as  great  in 
value  as  the  annual  turnover! 

Connected  with  the  large  plant  is  a  great  flexibility  in  its  use, 
and  a  tendency  to  decreasing  cost  per  unit  of  traffic.  When  a  rail- 
way is  once  built,  its  roadbed  and  other  fixed  equipment  will  serve, 
within  wide  limits,  whether  the  traffic  be  large  or  small.  An  in- 
crease of  traffic,  tho  it  means  some  increase  in  operating  expenses 
(probably  even  here  not  a  proportionate  increase),  ordinarily  calls 
for  no  increase  of  plant.  Hence,  for  the  traffic  as  a  whole,  it  means 
decreased  expense  per  unit.  This  is  true,  of  course,  only  so  long  as 
the  fixed  equipment  does  continue  to  suffice  for  enlarging  traffic. 
With  continuing  enlargement,  the  stage  is  reached  where  the  plant 
no  longer  suffices.  A  single-track  road  eventually  may  need  to  be 
double-tracked,  or  the  double-tracked  road  four-tracked,  the  sta- 
tions and  terminal  facilities  enlarged,  and  so  on.  Then  there  often 
ensues  an  uneasy  period  for  the  railway  manager.  A  great  and 
probably  rapid  enlargement  of  plant  is  called  for,  while  the  traffic, 
tho  too  heav}'  to  be  handled  with  the  old  plant,  is  not  growing 
rapidly  enough  to  insure  at  once  full  employment  and  satisfactory 
earnings  for  the  enlarged  plant.  The  railway,  after  having  been 
overworked  with  its  former  outfit,  has  for  a  while  not  enough  busi- 
ness for  its  new  outfit.  This  sort  of  trying  transition  stage  is  most 
noticeable  when  a  railway  passes  from  a  single  track  to  double 
track,  yet  shows  itself  almost  as  much  in  the  enormous  new  facili- 
ties needed  in  regions  of  dense  population  and  traffic  by  roads 
already  double-tracked  or  even  four-tracked. 

Thru  all  these  changes,  and  with  the  irregularities  which  ensue 
from  the  gradual  growth  of  traffic  and  the  occasional  abrupt  in- 
crease of  plant,  there  runs  a  tendency  to  decreasing  cost  per  unit 


394         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [02-§2 

of  traffic;  that  is,  a  tendency  to  increasing  return.  A  double-track 
road,  with  a  sufficient  density  of  traffic,  carries  freight  and  pas- 
sengers more  cheaply  than  a  single-track  road;  a  four-track  road 
more  cheaply  than  a  double-track  one.  It  follows  that  two 
single-track  roads  over  the  same  route  are  a  wasteful  application 
of  the  community's  resources,  as  compared  with  one  double- 
track  road;  and  so  on.  And  it  follows  further  that  concentra- 
tion and  monopoly  promote  the  thriftiest  ways  of  laying  out  the 
railway  net. 

One  important  consequence  of  a  railway's  large  plant  is  the  fre- 
quency of  sudden  transition  from  financial  failure  to  financial  suc- 
cess. This  is  especially  the  case  in  rapidly  growing  communities. 
When  a  road  is  first  built,  the  traffic  may  not  be  large  enough  to 
make  operation  profitable.  Graduall}^  the  traffic  grows;  and,  as  it 
grows,  the  road  is  able  to  carry  it  with  existing  plant,  and  also  with 
operating  expenses  largely  unchanged.  A  stage  is  thus  reached 
where  the  traffic  and  the  revenue  from  it  are  such  that  a  profit  is 
earned,  tho  just  before,  with  a  traffic  but  little  smaller,  the  capital 
invested  had  secured  little  or  nothing.  An  abrupt  change  in  finan- 
cial outcome  takes  place,  and  with  it  a  sharp  change  in  the  market 
price  of  the  railway's  securities.  For  the  same  reason,  fluctua- 
tions in  general  business  activity  are  of  special  effect  on  railways. 
In  times  of  depression  and  slackened  traffic  they  cannot  lessen 
their  heavy  capital  charges  at  all,  and  can  lessen  their  operating 
expenses  but  little.  In  times  of  revival  and  growing  traffic  their 
receipts  increase,  without  an  increase  in  their  expenses  at  all  cor- 
responding. Hence,  in  new  countries  or  in  countries  subject  to 
great  fluctuations  in  business  conditions,  railways  and  railway 
securities  offer  peculiar  opportunity  for  speculation  and  specula- 
tive in\'estment,  and  for  large  gains  by  the  shrewd  and  far-sighted. 
These  conditions  exist  in  the  United  States  more  markedly  than 
in  any  other  country,  and  have  had  much  to  do  with  the  great  for- 
tunes made  from  railways  in  this  country.  Somet  mes  the  first 
investors  —  the  "builders"  —  of  railways  have  reaped  large  gains, 
by  waiting  thru  thick  and  thin  until  the  growth  of  traffic  has  made 
the  enterprises  profitable.     Quite  as  often,  those  who  have  bought 


62-§  3]  RAILWAYS  395 

control  of  railways  in  the  intermediate  period  of  uncertainty  have 
made  fortunes  by  the  rapid  transition  from  loss  to  profit. 

§  3.  A  second  peculiarity,  no  less  important  in  its  consequences,  is 
the  element  of  joint  cost  in  railway  expenses.  In  good  pa  t  it  results 
from  the  first.  When  any  large  plant  is  used  for  diverse  products, 
the  ca  e  is  so  far  one  of  production  at  joint  cost.  So  it  is  with  a 
railway.  The  same  roadbed  is  used  for  passengers  and  freight, 
and  for  the  different  kinds  of  passengers  and  freight.  If  the  outlay 
for  plant  were  the  only  expense  incurred  in  rendering  the  service, 
the  case  would  be  one  completely  of  joint  cost.  There  are,  of  course, 
the  operating  expenses  in  addition.  But  the  expense  of  the  plant 
(represented  chiefly  by  interest  on  the  investment)  forms  an  un- 
usually large  part  of  the  total  cost  of  transportation.  In  other 
words,  retm-n  on  capital  is  an  unusually  large  part  of  the  expenses 
which  must  be  recouped  if  roads  are  to  be  built.  In  so  far,  the  prin- 
ciple of  joint  cost  is  applicable. 

But  the  operating  expenses  also  represent  in  large  part  joint  cost. 
Many  of  them  are  incurred  for  the  traffic  as  a  whole,  and  must  go 
on  whether  or  not  individual  items  of  traffic  are  undertaken.  Such 
is  most  obviously  the  case  with  the  large  expenditure  for  mainte- 
nance of  way.  The  roadbed  must  be  patrolled,  kept  in  order,  and 
repaired  from  the  wear  of  exposure  and  use;  and  this  whether  there 
be  much  or  little  traffic,  one  or  another  kind  of  traffic.  Safety 
appliances  must  be  there  in  any  case.  Much  station  expense,  es- 
pecially at  small  places,  is  the  same  whether  business  be  large  or 
small.  So  it  is  as  to  general  office  and  administrative  expenses. 
All  such  expenses  serve,  for  example,  equally  for  passengers  and 
freight,  and  cannot  be  said  to  be  incurred  specifically  for  either,  or 
to  be  separable  as  expense  for  one  or  the  other.  At  least  one  half 
of  the  total  operating  expenses  of  a  railway  are  impossible  of  appor- 
tionment to  any  class  or  items  of  traffic,  and  thus  stand  for  joint 
cost. 

Even  as  to  the  items  of  expense  which  are  not  common  for  the 
traffic  as  a  whole,  there  is  often  an  element  of  joint  cost  for  a  con- 
siderable block  of  traffic.  Those  operating  expenses  which  are  not 
wholly  joint  vary  in  the  main  according  to  the  number  of  trains  run 


396         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [62-§3 

and  the  distances  run  by  them;  that  is,  according  to  train  miles. 
Every  train  mile  means  so  much  separate  outgo  for  wages,  fuel, 
wear  and  tear  of  rolling  stock  and  of  track.  But  a  train  may  have 
ten  cars  or  thirty,  and  the  cars  may  be  full  or  empty.  Train  miles, 
and  consequently  the  immediate  expenses,  will  be  substantially  the 
same  whether  the  train  be  long  or  short,  full  or  empty;  but  the  ton- 
nage carried  will  be  very  different.  It  is  a  cardinal  maxim  in  rail- 
way operation  that  every  train  ought  to  have  as  many  cars  as  the 
engine  can  haul,  and  that  every  car  ought  to  be  loaded  to  its  full 
capacity.  But  this  ideal  maximum  utilization  of  the  rolling  stock 
—  this  ideal  fitting  of  ton  miles  to  train  miles  —  is  impossible  of 
attainment.  There  are  inevitably  some  short  trains  (especially 
as  to  local  freights)  and  some  cars  empty  or  half  full.  For  each 
train  by  itself  there  is  one  cost,  joint  for  all  it  carries. 

The  same  situation  is  even  more  obviously  present  in  passenger 
service.  Passenger  trains  must  run  on  their  schedule  time.  Their 
expense  is  substantially  the  same  whether  the  cars  be  full  or  empty, 
whether  they  have  the  maximum  number  of  cars  an  engine  can 
haul,  or  only  half  or  a  third  of  that  number.  A  very  great  increase 
in  traffic  entails,  it  is  true,  an  increase  in  passenger  train  miles. 
But  a  very  considerable  increase  in  passengers  and  in  revenue  may 
come  without  any  additional  train  miles ;  that  is,  without  any  ap- 
preciable difference  in  expense.  A  mail  car,  excursion  car,  sleeping 
car,  private  car,  attached  to  a  regular  passenger  train  involves  no 
additional  expense;  the  whole  train  is  operated  at  one  joint  cost. 
On  European  railways,  first-class,  second-class,  and  third-class  car- 
riages commonly  form  part  of  the  same  train,  and  are  operated 
at  one  joint  expense  for  the  train  as  a  whole.  The  apportionment 
of  charges  among  the  different  classes  of  passengers  proceeds  (in  a 
rough  way)  on  that  basis  of  utility  or  demand,  which,  as  has  been 
shown,  dominates  where  cost  is  joint.^ 

The  principle  of  joint  cost  underlies  the  much  misconceived  prac- 
tise of  "charging  what  the  traffic  will  bear."  That  phrase,  it  is 
true,  describes  also  another  and  very  different  aspect  of  railway 
rates  —  their  monopolistic  character  —  of  which  more  will  be  said 

1  See  above,  Chapter  16,  §  1. 


62^§  4]  RAILWAYS  397 

in  the  next  chapter.  As  commonly  used,  however,  the  phrase 
refers  to  the  apparent  failure  of  railway  rates  to  conform  to  cost 
of  production ;  and  it  calls  for  a  word  of  further  explanation. 

No  item  of  traffic,  it  is  obvious,  will  be  carried  at  a  charge  less 
than  the  separate  expense  involved  for  it.  But  above  the  small 
separate  expense  is  the  mass  of  joint  expense;  and  that  joint  ex- 
pense must  be  got  back  somehow,  or  else  railways  will  not  be  built. 
Some  items  of  traffic  will  "stand"  a  heavier  charge  than  others; 
that  is,  they  will  continue  to  be  offered  even  tho  the  transportation 
charge  be  high.  Other  items  will  "stand"  only  a  low  charge;  that 
is,  they  will  not  come  unless  the  charge  be  low.  The  joint  expense 
will  be  got  back  from  the  former  set  much  more  than  from  the  lat- 
ter. This  is  the  main  explanation  of  the  classification  of  freight; 
that  is,  the  arrangement  of  articles  in  classes,  with  a  higher  rate  per 
unit  of  weight  on  some  than  on  others.  Railways  in  all  countries, 
whether  under  public  or  under  private  management,  habitually 
charge  less  per  ton  mile  on  cheap  bulky  articles  than  on  articles  hav- 
ing high  value  per  unit  of  weight.  Thus  coal,  ores,  lumber,  are  "  low- 
class"  articles,  on  which  rates  are  relatively  low;  textiles  and  gro- 
ceries are  "high-class"  articles,  and  on  them  rates  are  high.  The 
coal,  ores,  lumber,  will  not  be  offered  for  transportation  unless  rates 
be  low;  the  traffic  will  bear  no  more.  The  textiles  and  groceries 
will  be  offered  even  tho  the  charge  be  relatively  high;  the  traffic 
will  bear  it.  The  textiles  and  groceries,  therefore,  will  contribute 
much  more  to  the  general  (joint)  expenses  than  the  coal  and  lum- 
ber. In  railway  parlance,  the  "profit"  on  the  one  is  greater  than 
on  the  other;  which  means  that  there  is  a  greater  excess  of  receipts 
over  separable  expenses.  Where  both  kinds  of  commodities  are 
carried  on  one  and  the  same  train,  there  are  virtually  no  separable 
expenses  for  either.  Barring  such  items  as  loading  and  unload- 
ing, all  the  expense  is  joint,  and  the  principle  of  joint  cost  has 
full  play. 

§  4.  To  explain  an  economic  phenomenon  is  by  no  means  the 
same  thing  as  to  justify  it.  People  constantly  confound  these  two 
proceedings,  and  suppose  that  because  an  economist  shows  how  a 
given  result  comes  to  pass,  he  therefore  implies  that  it  is  a  right 


398         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [62-§4 

result.  That  the  principle  of  joint  cost  explains  in  good  part  the 
practise  of  charging  what  the  traffic  will  bear  does  not  prove  the 
practise  to  be  just. 

As  to  the  question  of  propriety  or  justice,  there  is  much  hazy  talk 
among  persons  who  have  had  to  give  attention  to  railway  matters 
but  have  not  been  versed  in  general  economics  —  such  as  railway 
managers,  and  judges  and  public  officials  concerned  with  the  en- 
forcement of  rate  regulation.  These  often  speak  as  if  it  w^ere  ob- 
viously and  intrinsically  "just"  that  a  commodity  having  higher 
value  should  be  charged  higher  freight  rates.  It  must  be  confessed 
that  some  trained  economists  have  spoken  in  the  same  loose  way. 
Yet  no  one  would  apply  such  a  notion  to  transportation  by  pack 
mule  or  wagon;  the  charge  here  is  the  same  (aside  from  insurance 
and  the  like)  whether  the  articles  be  silks  and  precious  metals  or 
coal  and  brick.  Being  habituated  to  a  different  mode  of  fixing 
railway  rates,  people  think  of  it  as  righteous;  for  they  commonly 
regard  the  wonted  order  of  things  as  just. 

The  justification  of  charging  what  the  traffic  will  bear  must  rest 
on  a  further  principle :  namely,  that  it  conduces  to  the  fullest  utili- 
zation of  the  railway.  More  service  is  got  by  the  community  on 
this  plan  than  would  be  got  on  a  plan  of  uniform  rates.  If  all  rates 
were  on  a  uniform  toll  plan,  being  the  same  per  ton  mile  on  each 
and  every  kind  of  freight  —  a  so-called  system  of  "natural"  rates 
—  bulky  articles  would  have  to  pay  more  than  now,  and  compact 
and  expensive  articles  would  have  to  pay  less.  Of  the  expensive 
freight,  however,  little  more  would  be  offered  because  of  the 
lowered  rates;  whereas  the  amount  of  the  bulky  articles  offered  for 
transportation  would  be  greatly  diminished  b}^  the  higher  rates. 
The  only  way  in  which  the  bulky  articles  can  be  made  to  move  in 
great  quantities  is  by  carrying  them  at  low  rates;  just  as  —  to  re- 
sort again  to  a  comparison  now  familiar  to  the  reader  —  the  only 
way  in  which  cotton  seed  can  be  disposed  of  is  by  offering  it  at  a 
price  which  is  low  as  compared  with  the  price  of  cotton  fiber.  Most 
of  the  expense  involved  in  carrying  the  bulky  articles  is  incurred 
anyhow;  it  is  involved  in  the  general  or  joint  expense  of  building 
and  operating  the  railway.    The  only  way  to  get  the  full  utilization 


G2-§  5]  RAILWAYS  399 

of  all  this  labor  and  expense  is  to  fix  the  rates  in  such  manner  that 
the  transportation  shall  come. 

The  geographical  division  of  labor  has  been  most  profoundly 
affected  by  railways  in  the  production  of  these  very  articles,  having 
great  bulk  and  weight  relatively  to  their  value  —  coal,  ores,  lum- 
ber, and  the  like.  The  vast  development  of  modern  industry 
could  hardly  have  taken  place  without  their  transportation  on  a 
great  scale  at  low  rates.  Thru  the  general  practise  of  charging 
what  the  traffic  will  bear,  the  railway  plant  has  been  made  to  pro- 
duce its  most  far-reaching  results. 

§  5.  Some  other  consequences  of  the  principle  of  joint  cost  have 
been  and  are  of  large  social  significance. 

Railway  rates  are  necessarily  flexible.  Even  tho  rates  as  a 
whole  be  so  fixed  as  to  cover  the  total  cost,  there  is  no  clear  rela- 
tion between  any  specific  rate  and  the  specific  cost  of  carriage.  The 
absence  of  any  precise  measure  of  cost  of  service  makes  it  plausible 
to  adjust  the  charge,  apparently  arbitrary  as  it  must  be  in  any  case, 
according  to  all  sorts  of  real  or  supposed  benefits.  "Where  govern- 
ments manage  railways,  it  leads  easily  to  the  determination  of  rates 
on  other  grounds  than  those  directly  related  to  transportation.  It 
may  be  supposed,  for  example  (according  to  the  protectionist  no- 
tions so  widely  prevalent),  that  imports  are  bad  and  should  be  dis- 
couraged, while  exports  are  advantageous  and  should  be  promoted 
—  a  notion  which  leads  naturally  to  high  rates  on  things  imported 
and  low  rates  on  things  exported.  If  there  were  clearly  a  financial 
loss  in  carrying  at  low  rates  the  goods  destined  for  export,  govern- 
ments would  hesitate  as  long  before  conceding  specially  low  rates  as 
they  do  in  granting  direct  money  subsidies  on  exports.  The  ques- 
tion of  money  loss  or  gain  is  obscured  when  no  specific  railway  rate 
can  be  shown  to  involve  a  direct  loss.  Again,  low  rates  which 
favor  a  particular  set  of  constituents,  or  a  given  locality,  will  be 
similarly  easy  to  bring  about,  and  may  be  similarly  in  apparent 
accord  with  the  general  ways  of  rate  making.  To  arrange  railway 
charges  on  a  "just"  basis,  as  is  the  aim  of  a  government  in  man- 
aging a  railway,  is  a  task  of  peculiar  difficulty  and  complexity. 

The  same  difficulty  exists,  of  course,  when  a  government,  tho  it 


400         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [62-§6 

does  not  itself  operate  the  railways,  regulates  the  rates  of  private 
corporations.  This  is  what  the  government  of  the  United  States 
sets  out  to  do,  as  to  the  interstate  traffic  under  its  control.  The 
Interstate  Comine'  ce  Act  of  ISSTsays  that  rates  shall  be  "reason- 
able.'" What  is  the  standard  or^measure  of  reasonableness  in  rates? 
It  is  not  difficult  to  answer  this  question  as  regards  the  general 
range.  Rates  as  a  whole  should  not  be  higher  than  will  suffice  to 
yield  a  normal  return  on  the  capital  invested  in  railways,  a  "nor- 
mal" return  being  understood  to  include  not  only  interest,  but 
something  in  addition  by  way  of  compensation  for  risk  and judg- 
ment.  Even  tho  no  absolutely  precise  settlement  of  ^ueka  rateof 
return  be  feasible,  an  approximation  to  it  can  be  reached  -f-  six 
per  cent,  or  eight  per  cent,  or  something  of  the  sort. ,  But  this  helps 
very  little  as  regards  any  individual  rate.  Whether  the  individual 
rate  is  "reasonable"  is  a  question  of  its  right  adjustment  to  the 
traffic  demand  and  to  the  best  utilization  of  plant  and  equipment. 
It  happens  that  this  question  of  principle  has  not  often  been  de- 
liberately considered,  either  in  the  United  States  or  in  other  coun- 
tries. The  general  methods  of  railway  rates,  as  they  developed 
under  the  tentative  and  profit-seeking  ways  of  privately  managed 
railways,  have  been  accepted  once  for  all.  That  rates  should  be 
lower  on  bulky  goods  is  thought  to  be  obviously  "right."  Simi- 
larly, the  existing  geographical  adjustments  of  rates,  with  wide 
variations  in  different  regions  and  between  different  places,  have 
been  left  in  the  main  undisturbed.  Probably  this  rule-of-thumb 
policy  has  been  the  wisest  one.  Any  scheme  of  symmetrical  rates 
based  on  supposed  principles  of  justice  or  naturalness  would  have 
fettered  the  fullest  development  of  traffic  by  railways. 

§  6.  Still  another  consequence  of  the  element  of  joint  cost,  in  the 
United  States  especially,  was  a  perfect  chaos  in  the  rate  system. 
This  was  unmistakably  the  situation  before  the  enactment  of  the 
Interstate  Commerce  Act  in  1887;  and  tho  matters  mended  there- 
after, much  confusion  still  remained.  In  this  country,  as  in  others, 
railway  rates  were  developed  tentatively.  The  possibilities  of  car- 
rying bulky  goods  at  low  rates  over  long  distances,  and  of  the  other 
adjustments  of  rates  on  different  articles  and  to  different  regions, 


62-§6]  RAILWAYS  401 

were  discovered  gradually.  No  settled  tariffs  of  rates  existed  in 
the  early  days,  or,  if  any  existed,  they  were  disregarded.  All  rates 
were  "  special"  rates;  that  is,  were  reached  in  each  case  by  higgling 
between  shipper  and  carrier.  This  method,  or  lack  of  method,  no 
doubt  promoted  flexibilitj^  in  rates,  high  utilization  of  the  railway 
plant,  and  economy  in  its  operation;  but  it  caused  also  grave  evils. 

One^great  evil  was  the  power  in  the  hands  of  railway  managers. 
With  the  widening  of  the  market  due  to  cheap  transportation,  the 
price  of  this  very  transportation  became  of  crucial  importance. 
Success  in  business  was  possible  only  to  the  man  who  got  as  low 
rates  as  his  competitors.  Favors  in  rates  might  easily  mean  a  for- 
tune. The  railway  traffic  manager  could  make  or  unmake  this  man 
or  that  town.  Such  power  over  the  fortunes  of  others  can  be  in- 
trusted to  very  few  men  without  being  abused.  It  constitutes 
perhaps  the  strongest  reason  for  public  control,  whether  directly  by 
government  management  or  indirectly  by  government  regulation. 

In  the  United  States,  the  power  was  sometimes  used  corruptly. 
Those  in  control  of  railways  —  managers  and  directors  —  arranged 
for  themselves,  as  traders  and  shippers,  lower  rates  than  other 
shippers  got.  This  sort  of  practise  is  not  only  corrupt,  in  that  it 
violates  the  fiduciary  obligations  of  directors  and  managers  —  their 
most  obviousTegal  and  moral  duty  is  to  manage  the  railway 
with  the  single  mind  to  the  advantage  of  the  shareholders;  it 
is  also  inconsistent  with  the  fundamental  principle  that  competi- 
tion should  be  on  even  terms.  Here  the  game  was  played  with 
loaded  dice. 

More  commonly,  however,  favors  in  rates  were  given  not  in 
arbitrary  or  corrupt  ways,  but  under  the  stress  of  railway  compe- 
tition. That  competition,  as  has  already  been  noted,  is  made  pe- 
culiarly severe  because  of  the  conditions  of  joint  cost.  Rather  than 
let  any  particular  item  of  traffic  go  elsewhere,  the  railway  manager 
will  accept  any  rate  which  yields  something  over  the  expense  (com- 
paratively slight)  entailed  by  that  specific  item.  A  large  shipper, 
in  dealing  with  competing  railways,  can  play  off  one  against 
another,  and  secure  for  himself  special  rates.  In  the  old  days, 
corruption  or  semi-corruption  of  the  traffic  manager  —  say  by 


402         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [62-§7 

offering  him  shares  in  the  large  shipper's  corporation  —  played  its 
part.  But  competition  between  railways,  and  their  inevitable 
eagerness  to  "get  the  tonnage,"  were  the  main  causes  of  the  favors 
to  large  shippers. 

Not  infrequently,  in  cool  recognition  of  this  situation,  a  railway 
would  deliberately  select  some  individual  shipper  as  its  agent  in 
securing  what  was  regarded  as  a  "fair"  share  of  the  competitive 
traffic.  A  person  so  favored,  of  course,  had  a  great  advantage 
over  others  in  the  same  sort  of  business.  He  could  carry  on  opera- 
tions on  a  larger  scale,  and  was  likely  to  wax  strong  and  rich.  This 
was  not  unwelcome  to  the  railway,  so  long  as  he  enabled  it  to  hold 
the  traffic  as  against  rival  roads.  But  eventually,  in  not  a  few 
cases,  these  favored  shippers  became  so  strong  and  rich  that,  from 
having  been  the  servants  of  the  railways,  they  became  their  masters. 
Their  operations  grew  to  be  on  so  huge  a  scale  that  they  could 
throw  traffic  from  one  road  to  another,  and  bring  any  and  every 
road  to  accept  their  terms;  that  is  to  give  them  lower  rates  than 
the  ordinary  shipper.  This  was  the  case  conspicuously  with  the 
Standard  Oil  Company,  which  began  as  the  favored  shipper  of  one 
of  the  Eastern  trunk  lines  (first  of  the  New  York  Central,  then  of 
the  Erie  also)  and  by  this  advantage  finally  was  enabled,  or  at 
least  aided,  to  get  into  its  hands  so  preponderant  a  share  of  the 
business  of  refining  and  shipping  oil  that  it  could  virtually  dictate 
its  own  terms  to  all  the  railways.  Such,  too,  was  the  development 
of  some  of  the  great  Chicago  packing  houses. 

These  extraordinary  effects  of  railway  competition  showed  the 
modern  business  system  at  its  worst.  They  unexpectedly  and  arti- 
ficially accentuated  the  trend  toward  large-scale  operations;  they 
placed  a  premium  on  untruthfulness,  intrigue,  bullying,  spying. 
Yet  it  must  be  said  also  that  this  same  factor  of  railway  competi- 
tion immensely  promoted  efficiency  in  operation.  Every  railway 
manager  was  put  on  his  mettle  to  carry  the  tonnage  at  a  profit,  even 
with  low  rates.  Freight  rates  on  American  railways  became  re- 
markably low,  and  especially  low  on  that  long-distance  traffic 
which  was  most  the  subject  of  competition. 

§  7.   "Rebates,"  of  which  so  much  has  been  heard  in  discussion 


62-§  7]  RAILWAYS  403 

of  American  railway  regulation,  are  not  bad  in  themselves.  They 
are  bad  if  not  given  to  all  shippers  on  the  same  terms.  The  thing 
which  legislation  and  public  opinion  try  to  prevent  is  inequality  of 
rates.  Rebates  and  the  like  devices  are  objectionable  because  thej^ 
are  the  means  of  discriminating  between  different  shippers.  In  the 
earlj^  days,  when  railways  were  looked  on  as  businesses  like  any 
other,  it  was  natural  to  leave  their  charges  to  the  higgling  of  the 
market  and  to  accept  without  objection  those  inequalities  which 
higgling  always  brings  about  and  at  the  same  time  ordinarily  tends 
to  minimize.  As  the  immense  importance  of  railways  in  affecting 
other  businesses  came  to  be  seen,  higgling  and  discrimination  fell 
into  opprobrium,  and  rebates  and  the  like  devices  were  prohibited. 

Rebates,  again,  are  not  welcome  to  railways.  The  railway  man- 
ager (unless  by  chance  in  corrupt  collusion  with  a  shipper)  does  not 
wish  to  cut  his  rate;  he  wishes  to  get  as  much  as  possible.  In  the 
vast  majority  of  cases,  he  is  forced  to  a  concession  by  the  competi- 
tion of  a  rival  route. 

The  natural  step  for  competing  railways  is  to  put  an  end  to  com- 
petition by  combining  to  fix  rates  once  for  all.  Hence  railw^ay 
pools  and  combinations  appeared  at  an  early  date,  as  a  means  of 
putting  an  end  to  "ruinous"  or  "cutthroat"  competition.  Such 
pools  are  hard  to  hold  together,  at  least  under  the  English  and 
American  law,  which  make  them  void  and  non-enforceable  ;i  but  so 
far  as  they  go,  they  check  the  tendency  to  special  rates  for  favored 
shippers.  They  are  thus  a  means  of  furthering  equality  of  treat- 
ment and  equality  of  industrial  opportunity.  None  the  less,  our 
Interstate  Commerce  Act  prohibited  combination  of  any  sort;  and 
the  prohibition  was  made  even  more  drastic  by  the  general  anti- 
monopoly  act  of  1890,  known  as  the  Sherman  Law.  The  Inter- 
state Commerce  Commission  repeatedly  recommended  the  repeal 
of  this  sort  of  legislation,  and  the  authorization  of  pools  and  rate 
agreements.  The  anxious  fear  among  our  public  men  of  being  sup- 
posed to  favor  monopolies  has  prevented  any  relaxation  of  the 
stringent  restriction;  and  this,  even  tho  the  recommendation  is 
coupled  with  the  proviso  that  the  rates  fixed  after  pooling  or  agree- 

1  Compare  Chapter  65,  §  1. 


404         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [62-§8 

ment  should  be  subject  to  public  approval  (say  that  of  the  Inter- 
state Commerce  Commission).  In  the  absence  of  any  available 
means  of  escaping  the  stress  of  competition,  railways  were  impelled 
to  combine  once  for  all,  rival  roads  being  absorbed  under  single 
control.  The  consolidation  of  the  railway  net  into  great  systems, 
which  went  on  so  rapidly  during  the  twenty  years  after  the  pas- 
sage of  the  act  of  1887,  tho  by  no  means  due  solely  or  even  chiefly 
to  this  cause,  was  promoted  by  the  fact  that  railways  were  deprived 
of  their  best  means  of  self-defense  against  competition.  Our  legis- 
lation on  railways  was  in  this  regard  inconsistent  with  itself.  It 
prohibited  discrimination,  yet  also  prohibited  one  of  the  means  of 
checking  discrimination.  It  prohibited  combinations  and  pools, 
yet  promoted  the  rapid  march  of  complete  consolidation. 

The  great  and  flagrant  inequalities  in  rates,  by  rebates  and 
otherwise,  were  largely  brought  to  an  end  by  the  activity  of  the 
Interstate  Commerce  Commission.  An  aroused  public  opinion  has 
contributed  to  this  betterment;  the  elimination  of  competition 
thru  the  consolidation  of  the  railways  contributed  even  more.  So 
long  as  railway  competition  persists,  it  will  always  be  difficult  for 
traffic  managers  to  resist  the  temptation  of  securing  larger  tonnage 
by  favors  to  this  or  that  shipper;  and  ingenious  devices  will  be 
sought  —  in  the  way  of  allowances  for  switching  or  for  damages, 
manipulations  of  one  sort  or  another  —  for  "defeating"  the  nom- 
inal rate.  The  prohibitions  and  penalties  of  legislation  would  be 
made  much  more  effective  if  railways  were  allowed  to  make  rate 
agreements  openly.  Here,  as  elsewhere,  our  public  policy  is  still 
ruled  by  a  panic  fear  of  monopoly  and  an  unwillingness  to  face  the 
essential  problem,  how  to  regulate  monopoly  successfully.^ 

§  8.  The  principle  of  joint  cost,  to  which  so  much  attention  has 
been  given  in  this  chapter,  is  not  of  the  same  significance  in  all 
stages  of  railway  development.  Its  importance  is  less  in  thickly 
populated  countries  with  well-established  industries  than  in  coun- 
tries with  thin  population  and  industries  rapidly  shifting.     It  bears 

^  This  anomaly  was  at  last  removed  by  the  Transportation  Act  of  1920,  which 
authorized  tho  pooling  of  freight  traffic  by  railways,  under  the  supervision  of  the 
Interstate  Commerce  Commission. 


62-§8]  RAILWAYS  405 

perhaps  most  on  the  special  problems  of  pioneer  regions;  and  as 
these  regions  advance  beyond  the  frontier  stage,  it  ceases  to  be  all- 
pervading.  The  general  reasoning  has  more  application  to  the 
United  States  of  1870  than  to  the  United  States  of  1920;  and  more 
to  the  United  States  in  general  than  to  the  older  European  coun- 
tries like  England,  France,  and  Germany. 

The  applicability  of  the  principle  of  joint  cost  to  railway  prob- 
lems depends  in  the  last  analysis  on  the  existence  of  capacity  not 
fully  utilized.  There  must  be  either  a  plant  indispensable  in  order 
that  a  given  kind  of  traffic  {e.g.  passenger)  shall  be  carried  at  all, 
which  yet  is  not  utilized  to  the  full  for  that  traffic;  or  else  operating 
expenses  (such  as  signalling,  station,  terminal  expenses)  which  are 
in  the  same  way  indispensable  for  a  given  traffic  but  would  suffice 
for  the  handling  of  further  traffic  if  it  could  be  secured.  The  most 
striking  illustration  is  that  of  "back-loading."  Here  is  an  almost 
complete  analog}^  to  the  case  of  joint  cost.  That  case,  in  its  sim- 
plest form,  appears  where  the  physical  conditions  make  it  inevitable 
that  one  of  the  joint  commodities  be  produced  in  unalterable  pro- 
portion to  any  other ;  so  many  pounds  of  seed  are  necessarily  avail- 
able for  each  pound  of  fibre.  Precisely  in  the  same  way,  where 
there  is  back-loading,  just  so  many  train-miles  or  car-miles  of  rail- 
road service  are  available  when  the  equipment  makes  the  back 
journey.  From  this  extreme  case  railroad  conditions  shade  off  into 
those  at  the  other  extreme,  where  we  have,  not  capacity  knocking 
at  the  doors  for  utilization,  but  the  ordinary  case  of  a  large  plant 
and  a  high  proportion  of  fixed  charges.  As  railways  and  the  re- 
gions they  serve  emerge  from  the  pioneer  stage;  as  traffic  becomes 
denser  and  more  regular;  as  the  different  regions  served  become 
industrially  more  homogeneous;  as  the  railway  becomes  able  to 
utilize  its  entire  plant  and  its  whole  operating  force  continuously 
and  systematically  —  the  special  characteristics  pointed  out  in 
this  chapter  become  less  dominant.  But  tho  less  dominant,  they 
never  cease  to  be  important.  It  will  always  be  difficult  to  say  with 
precision  what  is  the  cost  of  a  particular  item  or  class  of  traffic.  It 
will  remain,  for  example,  impracticable  to  allocate  with  exactness 
the  cost  of  passenger  as  compared  with  freight  traffic,  or  to  say  that 


406         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [62-§8 

a  charge  of  two  cents  or  three  cents  a  mile  is  in  any  exact  or  even 
approximate  accordance  with  the  specific  cost  of  conveying  pas- 
sengers. If  indeed  a  road  were  used  only  for  passenger 
traffic,  and  were  utilized  to  the  full  for  that;  if  no  occasion 
arose  for  turning  its  roadbed  and  facilities  to  freight  also  —  then 
a  sufficiently  close  determination  of  passenger  cost  per  mile  could 
be  made,  and  a  proper  or  just  charge  fixed  accordingly.  The 
converse  case  arises  when  a  road  can  be  utilized  (as  with  a  coal 
road  or  a  logging  road)  for  freight  only.  But  where  there  is  a 
jumble  of  diversified  traffic  —  and  traffic  not  merely  diversified, 
but  attracted  to  the  railway  only  thru  adjustment  of  rates  to  the 
demand  for  transportation  —  then  railway  charges  are  most  flexi- 
ble, least  reducible  to  a  plain  and  simple  rule. 

To  repeat,  the  cardinal  element  —  capacity  not  utilized  to  the 
full  —  becomes  less  vital  in  a  country  thickly  populated  and  in- 
dustrially solidified.  In  such  a  country  the  monopoly  position  of 
a  railway  becomes  relatively  more  significant  for  the  explanation  of 
the  special  characteristics  of  railway  rates.  To  this  phase  of  the 
subject  attention  is  given  in  the  next  following  chapter. 


CHAPTER  63 
Railway  Problems,  continued 

Section  1.  Effects  of  railways  on  distribution.  An  unearned  increment  anal- 
ogous to  rising  rent  of  land,  407  —  Sec.  2.  Tendency  toward  con- 
centration of  ownership;  how  promoted  by  American  methods  of  cor- 
porate organization.  Overcapitalization  and  its  consequences,  409  — 
Sec.  3.  Stock  speculation,  stimulated  by  overcapitalization,  has  facih- 
tated  acquisition  of  control  by  the  "great  operators,"  412  —  Sec.  4. 
"Inside  management"  and  its  evils,  414  —  Sec.  5.  What  benefits  have 
come  from  private  ownership  in  the  United  States,  and  how  far  railway 
fortunes  have  been  earned,  415  —  Sec.  6.  Increasing  tendency  to  mo- 
nopoly, and  need  of  public  control  over  rates,  417. 

§  1.  Railv/ays  have  been  the  most  important  agents  in  increas- 
ing the  disparities  of  wealth  in  modern  times  and  in  bringing  about 
great  fortunes.  They  have  had  this  effect  indirectly,  by  promoting 
the  general  tendency  to  large-scale  production.  They  have  had  the 
same  effect  more  directby',  thriTthfe  tendency  to  increasing  gaijns 
with  their  growth,  thru  the  concentration  of  their  ownership,  thru 
the  possibilities  of  speculative  manipulation.  Their  direct  effects 
on  the  distribution  of  wealth  have  appeared  most  markedly  in  the 
United  States,  and  it  is  with  the  course  of  development  in  this  coun- 
try that  the  present  chapter  is  chiefly  concerned. 

First,  as  to  increasing  gains  from  their  operation.  A  railway  in 
a  growing  country  (and  the  railway  itself  causes  a  country  to  grow) 
is  largely  in  the  position  of  good  land.  It  tends  to  advance  in 
value  and  to  secure  an  increment  of  economic  rent.  This  tendency 
is  combined  with  that  other,  noted  in  the  preceding  chapter,  to- 
ward a  rapid  transition  from  financial  uncertaintA^  to  financial 
prosperity.  The  two  combine  to  make  the  railway  a  frequent  occa- 
sion pf  "  conjunctural  gains,"  as  the  Germans  call  them. 

In  paVt,  the  railways'  accretion  of  economic  rent  is  due  to  purely 
physicaj  causes.  Some  lines  have  better  natural- 1  nc^tLons  than 
others.  The  New  York  Central  Road  has  an  exceptional  location  in 

407 


408         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [63-§  1 

the  Mohawk  Valley  and  along  the  eastern  bank  of  the  Hudson. 
Any  railway  which  first  secures  the  best  route  along  a  river  valley 
has  an  advantage  over  later  competitors  in  economy  of  construc- 
tion and  ease  of  operation. 

But  an  even  greater  part  Is  played  by  general  social  causes. 
Population  clusters  along  the  line  of  a  railway;  towns  and  indus- 
tries attach  themselves  to  it.  Its  traffic  increases,  while  on  the 
whole  the  expense  of  conducting  the  traffic  becomes  less.  Tho 
other  railways  may  be  built  in  such  way  as  to  compete  with  it, 
the  established  railway  has  an  advantage  which  can  be  lost  only 
by  very  bad  management  or  very  unexpected  changes  in  the  course 
of  industry  or  invention.  One  great  source  of  advantage  is  in  ter- 
minal facilities  at  the  cities.  Urban  land  becomes  expensive,  and 
the  railway  which  got  its  land  cheap  in  the  early  days  has  an  ad- 
vantage over  competitors  who  try  to  enter  in  later  days.  It  is 
true  that  this  sort  of  advantage,  like  others  that  rest  on  social 
causes,  is  subject  to  change  and  possible  decline  with  shift^^in  popu- 
lation and  with  new  inventions.  The  subway  method  of  urban 
transportation,  which  has  so.  profoundly  affected  site  values  in 
New  York,  has  also  deprived  the  New  York  Central  Railway  of  the 
differential  advantage  which  it  formerly  possessed  from  being  the 
only  line  with  a  passenger  terminal  in  the  heart  of  the  city.  None 
the  less,  the  advantages  of  an  established  railway  tend  in  general 
to  increase  steadily  with  the  growth  of  population  and  industry. 

The  questions  presented  by  this  advance  in  value  are  the  same  as 
those  presented  by  the  same  advance  in  the  case  of  urban  sites  and 
agricultural  land.  The  increase  has  been  no  more  rapid  in  the  rail- 
ways than  in  the  other  cases,  and  in  general  has  been  less  striking 
than  that  in  the  value  of  urban  sites.  Sometimes  it  is  proposed  to 
tax  railways  at  an  especially  heavy  rate,  or  to  compel  them  to  lower 
their  charges,  because  their  gains  are  thus  tending  to  rise.  It  may 
be  desirable  to  capture  some  of  this  unearned  increment;  but  it  is 
not  more  desirable  than  to  capture  other  slices  of  the  same  sort  of 
unearned  increment.  The  fact  that  a  railway  has  a  "franchise" 
or  is  a  "public"  industry  is  often  urged  as  a  reason  for  special 
treatment.     This  is  to  blind  ourselves  with  names.     A  "  franchise  " 


63-§2]  RAILWAY  PROBLEMS  (Continued)  409 

simply  means  that,  under  the  technicahties  of  om*  legal  and  consti- 
tutional system,  the  process  of  regulating  incorporated  companies  is 
less  fettered  in  itself  than  is  that  of  dealing  with  real  property.  The 
franchise  does  not  in  itself  bring  a  substantial  economic  privilege. 
Neither  is  there  any  help  toward  getting  at  the  real  problem  from 
calling  a  railway  a  "public"  or  "public  service"  industry.  These 
phrases  are  merely  a  way  of  expressing  an  opinion  that  a  given 
industry  needs  some  special  sort  of  regulation  or  restriction.  So  far 
as  the  increasing  value  of  railways  is  concerned,  the  question  in 
principle  is  the  same  for  them  as  for  other  site  values  that  tend  to 
rise. 

§  2.  More  important  in  their  social  consequences  are  the^griden- 
£ies_  toward  unified  control  of  railways  —  both  toward  the  CQn=> 
cen.ti:atioft-Qf_i:mitrol  in  few  hands,  and  toward  the  emergence  of 
mpnopiily  thru  the  elimination  of  competition. 

The  concentration  of  control  or  ownership  in  few  hands  has  been 
promoted  by  the  way  in  which  our  laws  have  permitted  the 
organization  of  corporations  and  the  issue  of  corporate  securities. 
Loose  legislation,  and  (it  must  also  be  admitted)  looseness  in  the 
prevalent  standards  of  business  ethics,  have  here  led  to  some  of  the 
most  unwelcome  consequences  of  private  ownership. 

In  strict  contemplation  of  law  a  share  of  stock  is  a  certificate 
that  the  stated  amount  —  say  $100  a  share  —  has  been  contributed 
to  the  enterprise.  In  practise,  it  may  or  may  not  mean  anything 
of  the  kind,  at  least  in  the  United  States.  Our  laws  have  been  so 
framed  that  certificates  of  stock  have  been  handed  out  with  little 
regard  to  actual  investment.  Very  commonly  they  mean  nothing 
but  rights  to  vote,  and  so  to  control;  with  perhaps  a  hope  that  at 
some  distant  time  in  the  future  there  will  be  a  dividend.  Among 
the  railways  especially,  a  common  practise  has  been  to  issue 
"blocks"  of  securities  in  exchange  for  a  given  contribution  to  the 
enterprise;  say  $100  in  stock  and  $100  in  bonds  —  or  $200  in  nomi- 
nal value  of  securities  —  for  every  $100  actually  put  in.  "Over- 
capitalization" of  this  sort  has  been  a  well-nigh  universal  char- 
acteristic of  corporate  operations  in  the  United  States.  It  has 
led  to  bad  results  —  results  bad,  however,  not  so  much  in  the  way 


410         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [63-§  2 

usually  supposed,  as  in  ultimate  consequences  on  the  ownership 
and  control  of  the  railways. 

Overcapitalization  is  not  in  itself  a  ready  road  to  royal  profits. 
The  mere  printing  of  stocks  and  bonds  is  no  source  of  riches.  If 
securities  which  represent  no  investment,  or  a  less  investment  than 
their  face  value  indicates,  are  none  the  less  income-yielding  and 
profitable,  it  must  be  because  the  enterprises  which  they  represent 
are  profitable.  The  real  cause  of  gain  in  such  cases  is  either  good 
management  or  monopoly;  the  greatest  gain  comes  from  a  combin- 
ation of  the  two.  So  far  as  railways  or  other  industries  are  mo- 
nopolistic in  character,  successful  overcapitalization  —  successful, 
that  is,  in  the  pecuniary  sense  —  is  the  result  of  high  prices.  A 
monopoly  will  in  any  case  set  its  prices  as  high  as  it  can.^ 

To  this  general  statement,  as  to  almost  all  general  statements  in 
economics,  some  qualification  must  be  attached.  It  will  happen 
at  times  that  overcapitalization  does  cause  at  least  a  clinging  to 
high  prices.  The  managers  of  an  overcapitalized  monopoly  may 
have  to  face  the  fact  that  great  blocks  of  securities  are  outstanding, 
very  likely  issued  by  their  predecessors,  and  now  held  by  all  sorts 
of  investors.  They  are  then  loth  to  let  go  any  slice  of  its  profits. 
We  have  seen  that  often  the  monopoly  principle  of  maximum  net 
profit  is  not  applied  in  its  full  sweep,  especially  in  industries  which 
are  potentially  subject  to  public  control.^  Where  abnormal  returns 
on  the  original  investment  have  been  made,  concessions  to  public 
opinion,  in  the  way  of  lower  rates  or  better  facilities,  are  more 
likely  to  come  when  capitalization  has  not  been  inflated. 

Whether  there  has  been  in  fact  overcapitalization,  and  whether 
it  has  served  to  conceal  profits  unduly  high,  is  often  difiicult  to 

1  See  Chapter  15,  §  6. 

2  That  the  question  of  capitalization  is  chiefly  one  between  investors  and  man- 
agers, not  one  between  these  various  interested  persons  and  the  public,  is  illustrated 
by  two  conspicuous  oases  among  the  "trusts  " —  the  Standard  Oil  and  the  Tobacco 
combinations.  The  former  is,  from  the  business  man's  point  of  \new,  undercapital- 
ized; the  latter  overcapitalized.  The  former  has  been  managed  without  manipula- 
tion as  regards  "insiders"  on  the  one  hand,  the  investors  and  "outside"  speculators 
on  the  other.  The  latter  has  been  much  manipulated.  Both  have  been  highly 
profitable;  both  present  essentially  the  same  problems  as  regards  competition, 
monopoly,  prices. 


63-§2]  RAILWAY  PROBLEMS  (Continued)  411 

decide.  The  typical  railway  in  the  United  States  presents  a  per- 
plexing case.  At  the  outset  the  roads  were  usually  overcapitalized. 
But  at  the  outset,  and  when  first  put  in  operation,  they  were  but 
half  completed.  Unlike  European  railways,  they  began  with  a 
plant  and  equipment  adapted  to  a  scant  traffic,  and  largely  pro- 
visional. Graduall}',  as  the  country  grew  and  traffic  increased, 
they  were  improved  by  putting  some  share  of  earnings  into  enlarge- 
ments and  betterments.  This  process  continued  decade  after 
decade,  and  was  combined  with  the  direct  and  unmistakable  in- 
vestment of  additional  capital,  thru  the  issue  and  sale  of  more  stocks 
and  bonds.  What  the  total  investment  finally  was,  and  what  the 
relation  between  outstanding  securities  and  actual  investment,  be- 
came very  difficult  to  say.  Careful  separation  was  rarely  made  on 
the  records  between  operating  expenses  and  additions  to  plant. 

The  case  is  further  complicated  by  the  question  of  a  proper 
allowance  for  risk  and  for  skill  in  management.  Some  railways  have 
been  financially  profitable;  others  not  so.  Some  have  gone  thru  a 
long  period  of  no  returns  and  uncertain  prospects;  others  have 
earned  good  returns  from  the  very  start,  some  on  an  inflated  capi- 
talization. The  differences  are  partly  due  to  general  physical  and 
economic  causes,  partly  to  varying  judgment  and  skill.  The  mere 
fact  that  a  railway  has  been  unusually  profitable  is  no  more  a  proof 
of  special  advantage  or  monopoly  than  is  the  mere  fact  that  a  mer- 
cantile or  manufacturing  enterprise  has  yielded  a  fortune.  In  all 
such  cases  the  quality  of  the  management  is  an  all-important 
factor. 

It  is  not  easy  to  say  whether  railways  in  the  United  States  have, 
on  the  whole,  been  abnormally  profitable,  and  hence  whether  their 
overcapitalization  has  concealed  a  large  element  of  monopoly 
profits.  Successes  have  been  balanced  by  failures,  eventually  large 
returns  by  long  initial  periods  of  no  return  at  all ;  while  at  the  same 
time  problems  of  management  have  been  such  as  to  call  for  the 
highest  business  ability.  It  may  be  true,  as  is  commonly  main- 
tained in  behalf  of  our  railways,  that  in  view  of  all  the  risks  and  all 
the  enterprise  and  all  the  skill,  the  gains  from  them  have  not  been 
greater  than  those  secured  by  the  investing  classes  in  industry  at 


412         PROBLEMS  OF  ECONOMIC  ORGAXIZATIOX       [63-§3 

large,  and  in  that  sense  have  not  been  disproportionate  to  the 
energy  and  sacrifice  involved. 

It  is  doubtful  whether  the  whole  mechanism  of  irregular  and 
swollen  capitalization  was  at  any  time  necessary  or  wise.  Why 
not  provide  once  for  all  by  law  that  securities  shall  be  issued  only 
to  represent  what  has  been  invested?  It  is  true  that  such  a  limita- 
tion must  have  been  accompanied  by  a  liberal  margin  as  to  permis- 
sible returns.  The  risks  of  investment  must  be  offset_by_a-chance 
of  tempting  profits.  Railways  in  the  United  States  never  would 
have  been  built  by  private  capital  (and  public  enterprise,  tried  at 
the  outset,  proved  hopelessly  incapable  of  the  tasks  of  develop- 
ment) if  no  more  than  six  or  eight  per  cent  had  been  allowed  as  the 
maximum  return.  It  is  sometimes  said  that  freedom,  even  reck- 
lessness, in  the  issue  of  securities,  was  a  useful  device,  in  that  it  en- 
abled the  projectors  to  look  forward  to  returns  really  tempting,  and 
at  the  same  time  concealed  these  returns  from  a  grudging  public. 
Ten  per  cent,  for  example,  would  not  have  been  sanctioned ;  but  five 
per  cent  on  a  doubled  amount  of  stocks  and  bonds  caused  no  outcry. 
Possibly,  too,  there  is  a  seductive  effect  on  the  promoter  and  inves- 
tor from  the  appearance  of  getting  something  for  nothing.  A  more 
simple  and  straightforward  way  of  dealing  with  the  issue  of  securi- 
ties might  thus  have  dampened  in  some  degree  the  feverish  specu- 
lation and  restless  progress  of  railway  development.  But  a  slower 
pace  would  have  had  its  advantages  also,  and,  not  least,  restriction 
of  securities  would  have  saved  great  complications  in  the  later 
stages  of  established  monopoly  and  needed  regulation. 

§  3.  Certain  it  is  that  the  unrestricted  issue  of  securities  has 
promoted  acquisition  of  control  by  the  familiar  class  of  railway 
magnates. 

The  separation  of  control  from  investment  (and  so  from  owner- 
ship) has  not  usually  appeared  at  the  outset.  It  is  often  alleged 
that  even  at  the  start  the  real  promoters  and  managers  make  no 
investment  of  their  own  and  assume  no  real  risks.  They  are  sup- 
posed to  secure  all  the  needed  funds  by  the  sale  of  bonds  to  confid- 
ing in\estors,  keeping  for  themselves  the  stock  (issued  for  nothing), 
and  so  reaping  profits  without  ever  having  shouldered  any  risks. 


63-§3]  RAILWAY  PROBLEMS  (Continued)  413 

No  doubt  they  would  like  to  proceed  in  this  way,  and  sometimes 
succeed.  But  usually  the  matter  is  not  quite  so  simple.  The  "in- 
siders "  must  set  the  enterprise  going,  must  put  in  their  money  and 
stretch  their  credit,  take  the  securities  on  their  own  responsibility. 
Usually  they  are  associated  with  a  banking  firm,  which  exacts  its 
toll  for  backing  and  indorsing,  and  acts  as  middleman  in  eventually 
disposing  of  the  securities.  Bankers  as  well  as  promoters  neces- 
sarily assume  some  of  the  risks.  No  doubt  the  purchasers  of  the 
bonds  are  often  deceived ;  and  often  they  deceive  themselves,  think- 
ing that  a  so-called  "bond"  has  a  high  degree  of  security,  even  tho 
a  rate  of  interest  is  offered  which  on  its  face  tells  of  a  risk  involved. 
As  time  goes  on,  however,  with  misrepresentation  or  without,  the 
prior  securities,  which  have  the  first  claim  on  the  profits  and  involve 
the  least  risks,  get  into  the  hands  of  the  general  investing  public, 
and  the  shares  of  stock  remain  in  the  hands  of  the  projectors  and 
bankers. 

Shares  of  stock  mean  ownership  and  control.  In  the  eye  of  the 
law,  the  holders  of  bonds  are  simply  creditors,  entitled  to  their  in- 
terest, and  in  due  time  to  their  principal,  but  quite  without  voice 
in  the  management.  The  stockholders  are  apt  to  be  a  shifting  and 
speculative  body.  The  stock  itself  in  the  early  stages  commonly 
has  little  prospect  of  dividend,  and  is  valuable  for  the  time  being 
only  because  it  secures  control.  It  is  bought  and  sold  at  low  fig- 
ures. It  is  apt  to  fluctuate  sharply  in  value  because  of  the  abrupt 
fluctuations  in  the  financial  prospects  of  railways.^  It  is  precisely 
the  sort  of  security  that  finds  favor  for  speculative  purposes  on  the 
stock  exchanges.  The  original  promoters  sell  out  more  or  less,  as 
they  find  the  price  to  be  tempting.  They  are  concerned  much 
more  with  current  quotations  of  the  stock  than  with  the  perma- 
nent prosecution  of  the  enterprise.  The  original  notion  of  a  joint- 
stock  company  —  a  set  of  persons  associated  in  a  common  ven- 
ture —  quite  disappears.  Each  holder  tries  to  get  the  better  of 
the  others  by  buying  cheap  and  selling  dear. 

These  are  the  conditions  under  which  the  "great  operators" 
appear  and  under  which  the  vast  railway  fortunes  have  been  made. 

1  See  the  preceding  chapter,  §  2." 


414         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [63-§4 

Ownership  of  the  stock  and  control  of  the  railways  get  into  the 
hands  of  shrewd,  able,  daring  men.  These  see  the  possibilities  of 
future  gain  when  stock  quotations  are  low.  Very  likely,  once  in 
secure  control,  they  will  see  to  it  that  the  properties  are  eflBciently 
managed,  yield  large  returns  to  themselves,  and  even  bring  better 
service  for  the  community.  But  they  come  into  control  by  the 
machinery  of  stock  speculation.  Such  is  the  explanation  of  the 
riches  of  the  Vanderbilts,  Goulds,  and  their  fellows.  The  founders 
of  these  fortunes  were  not  the  original  projectors  and  promoters 
of  the  railways;  they  were  the  interlopers  who  secured  control  in 
the  later  stock-gambling  stage. 

§  4.  Over  and  above  the  great  fortunes  and  the  concentrated 
power  over  industry,  speculative  ownership  has  brought  some 
special  evils,  of  the  kind  designated  by  the  phrase  "  inside  manage- 
ment." 

Perhaps  the  most  striking  and  serious  evil  is  the  corrupt  or  semi- 
corrupt  manipulation  of  the  railways.  Those  in  control  may 
"wreck"  it;  may  make  it,  in  appearance  or  in  reality,  a  financial 
failure;  may  depress  the  prices  of  its  securities;  and  then  buy  up 
these  securities  at  the  low  prices.  Conversely,  they  may  manipu- 
late the  accounts  so  as  to  give  false  indication  of  financial  success, 
raise  the  prices  of  the  securities,  and  sell  at  high  prices  to  the  out- 
siders ;  buying  in  again  later  when  the  bubble  has  burst.  A  phase 
of  the  same  sort  of  thing  appears  when  other  railroads,  or  associated 
enterprises  such  as  bridges,  sleeping  cars,  terminal  companies, 
freight  lines,  are  organized  or  bought  by  the  insiders,  and  sold  to 
the  main  railroad  at  a  handsome  profit.  Sometimes  the  persons 
defrauded  by  these  performances  are  the  investors  proper;  quite  as 
often  they  are  other  stock  jobbers  and  gamblers,  ready  to  do  the 
same  thing  if  they  had  the  wit  and  the  opportunity.  The  greatest 
harm  from  it  all  is  a  demoralization  of  the  whole  class  in  the  busi- 
ness community  which  has  to  do  with  railway  administration. 

Still  another  phase  of  inside  management  has  been  the  manipu- 
lation of  rates  for  the  advantage  of  the  directors  and  managers;  pro- 
moted, as  has  already  been  said,^  by  the  flexibility  which  attaches 

iSee  Chapter  62,  §§5,  6. 


63-§5]  RAILWAY  PROBLEMS  {Continued)  415 

in  any  case  to  railroad  charges.  The  spirit,  good  or  ill,  which  ani- 
mates the  leaders,  spreads  in  this  case  as  in  others  to  all  parts  of  the 
enterprise.  Not  only  directors  and  influential  stockholders,  but 
managers  and  submanagers  secure  their  pickings.  A  whole  sys- 
tem easily  comes  to  be  honeycombed  with  corruption. 

These  evils,  all  closely  connected  with  the  peculiarities  of  corpo- 
rate organization  in  the  L^nited  States,  have  been  so  glaring  and 
cankerous  that  the  most  ardent  supporter  of  private  industry  must 
sometimes  stop  and  consider  whether  even  the  greatest  benefits 
can  offset  them.  No  doubt,  it  is  possible  to  exaggerate  the  evils 
which  arose;  and  it  must  be  remembered  that  they  were  not  pecul- 
iar to  railways.  The}'  were  part  of  the  raw  stage  of  industrial  de- 
velopment. Nor  were  they  all-pervading  among  the  railways 
themselves.  Tho  hardly  one  has  been  without  some  touch  of  dis- 
honest manipulation,  many  were  never  deeply  tainted  with  it. 
Even  where  the  worst  has  been  experienced,  the  community  at 
large  was  mainly  responsible.  The  whole  situation  was  accepted 
as  a  matter  of  course ;  partly  because  the  economic  and  social  con- 
sequences were  not  perceived,  but  in  no  small  degree  because  moral 
standards  were  lax.  In  both  regards,  a  great  change  for  the  better 
set  in  during  the  last  years  of  the  nineteenth  century  and  the  first 
of  the  twentieth.  The  public  began  to  understand  better  what 
speculative  railway  management  entails,  and  to  apply  higher  stand- 
ards to  business  operations  in  general.  The  great  moral  advance 
of  our  day  has  brought  a  higher  sense  of  the  social  responsibility 
and  solidarity.  Practises  common  in  the  last  generation  are  no 
longer  tolerated.  •"i"^^ 

§  5.  What  benefits  now  came  from  all  this  sullied  growth?  'v 
No  doubt,  rapid  railway  building  was  promoted.  Under  the 
stimulus  of  speculative  construction  and  operation,  the  American 
community  got  its  railways  earlier  and  got  more  of  them.  This 
the  community  universally  desired,  and  for  this  it  was  willing  to 
pay  handsomely.  Our  political  and  industrial  policy  has  been 
dominated  by  an  insensate  desire  for  swift  development,  for  un- 
locking the  land  and  its  resources,  for  the  utmost  increase  in  num- 
bers and  wealth.     The  sober  observer  may  question  whether  it 


416         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [63-§5 

has  all  been  worth  while.  A  slower  growth  and  a  smaller  present 
bulk  might  have  brought  a  better  social  structure.  But  our  ideal, 
such  as  it  was,  has  been  attained. 

The  march  of  improvement  was  hastened  not  least  among  the 
railways  themselves.  And  it  was  hastened,  paradoxical  as  the  state- 
ment may  seem,  both  by  competition  and  by  combination.  The 
bitterness  of  railway  competition  keyed  the  managers  to  the  high- 
est efficiency  in  operation;  the  lessons  learned  under  competition 
were  applied  with  striking  effect  in  the  ensuing  stage  of  combina- 
tion. One  of  the  causes  of  lowered  cost  of  transportation  was  the 
consolidation  of  the  railway  net  and  the  growth  of  the  great  sys- 
tems. That  process  was  facilitated  by  the  ease  with  which  control 
of  railways  was  bandied  to  and  fro  on  the  stock  exchange.  The 
rapidity  with  which  the  vast  systems  were  created  is  extraordi- 
nary. One  great  advance  came  in  1869-1873,  when  the  so-called 
trunk  line  systems  —  the  New  York  Central,  Pennsylvania,  Erie, 
Baltimore  and  Ohio  —  were  formed.  The  depression  of  1873— 
1879  gave  another  opportunity,  just  when  the  stage  of  revival  was 
impending,  for  the  creation  of  the  great  Southwestern  system  by 
the  arch-manipulator.  Jay  Gould.  Still  another  opportunity  came 
during  and  after  the  great  depression  of  1893-1896,  which  led  in  a 
few  years  to  the  Hill  system  in  the  Northwest,  the  Union  Pacific  or 
Harriman  in  the  Southwest,  the  Morgan  system  in  the  South.  The 
combinations  of  which  these  are  typical  examples  vastly  promoted 
railway  efficiency.  The  most  remarkable  achievement  of  the 
American  railways  —  an  achievement  not  matched  anywhere  in 
the  world —  has  been  the  cheapening  of  long-distance  transporta- 
tion; which  again  has  profoundly  affected  the  geographical  divi- 
sion of  labor,  both  within  the  country  and  in  the  exchanges  with 
other  countries,  and  has  increased  the  sum  total  of  the  industrial 
output. 

Historically,  the  course  of  development  seems  to  have  been  con- 
trolled by  a  fatal  destiny.  Given  the  impossibility  of  public 
ownership  and  management  (and  for  the  earlier  stages  of  railway 
development  in  this  country  public  operation  was  out  of  the  ques- 
tion) ;  given  the  eager  desire  of  the  community  for  ways  of  trans- 


■63-§6]  RAILWAY  PROBLEMS  (Continued)  417 

portation,  and  its  willingness  to  encourage  their  construction  in 
every  way;  given  the  looseness  of  corporation  laws,  the  universal 
speculative  temper,  the  laxness  of  business  standards;  given  the 
periodic  fluctuations  in  industry,  the  economic  peculiarities  of  rail- 
ways, the  opportunities  for  large-scale  ventures  —  and  the  harvest 
was  prepared  for  the  daring  and  able  operator.  Perhaps  all  the  ad- 
vantages from  rapid  construction,  wide  permeation  of  the  land 
with  railway  facilities,  from  competition  and  consolidation  and  vig- 
orous management,  could  have  been  got  in  some  other  way;  but  a 
train  of  deep-seated  causes  seems  to  have  decreed  that  they  should 
come  in  just  this  way  and  with  just  these  checkered  results. 

§  6.  The  railway  situation  in  the  United  States  changed  with  the 
close  of  the  nineteenth  century,  and  railway  problems  took  a  new 
shape.  The  period  of  speculative  building  and  promotion  came 
to  its  end.  Consolidation  proceeded  apace,  even  tho  no  longer  by 
the  spectacular  method  of  single-handed  capture  of  great  systems. 
Competition  was  fast  eliminated.  The  railway  problems  came  to 
be  in  greater  degree,  and  in  simpler  form,  phases  of  the  problem  of 
monopoly. 

As  to  its  local  traffic,  a  railway  always  has  a  virtual  monopoly. 
True,  there  is  the  possible  substitute  of  other  transportation,  say 
by  wagon.  But  the  cheapness  of  railw^ay  transportation  is  so  great 
that  it  can  supersede  other  modes  of  carriage,  and  yet  exact  a 
charge  of  its  own  much  above  a  reasonable  rate.  Its  very  ability 
to  carry  at  low  charges  drives  out  competitors,  and  brings  a  situa- 
tion in  which  its  own  charges  may  become  unduly  high. 

Yet  competitive  traffic,  tho  limited  to  perhaps  a  small  number 
of  points  on  the  railway  net,  affects  in  some  degree  the  whole. 
Local  rates  cannot  be  too  flagrantly  out  of  accord  with  other  rates, 
partly  because  of  public  opinion  and  possible  public  action,  partly 
because  local  business  will  dwindle  if  disproportionately  burdened. 
So  long  as  railway  competition  persists  —  and  it  is  apt  to  remain 
thru  the  early  stages  of  development  —  it  exercises  a  check,  more 
or  less  spasmodic,  yet  in  some  degree  effective,  on  the  general  range 
of  rates. 

But  as  the  lines  of  transportation  become  established,  competi- 


418         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [63-§6 

tion  tends  to  disappear.  Pools  and  rate  agreements  are  made; 
eventually  complete  combination  ensues.  All  the  factors  described 
in  the  preceding  pages  contribute  toward  it  —  the  severity  of  rail- 
road competition,  the  economies  of  large-scale  operation,  one-man 
power.  Competitive  bidding  for  traffic  is  superseded  by  consoli- 
dation of  the  rival  lines.  Competitive  building  is  superseded  by 
deliberate  division  of  territory.  The  railway  net  is  rapidly  settling 
down  —  not  indeed  to  the  stage  where  new  investment  is  no  longer 
needed,  but  to  the  stage  where  no  new  great  systems  are  being 
formed,  and  where  the  traffic  is  apportioned  once  for  all  among  the 
existing  systems. 

As  the  stage  of  monopoly  is  reached,  a  railway  is  tempted  to 
charge  what  the  traffic  will  bear  in  the  monopoly  sense  —  quite  a 
different  sense  from  that  explained  in  the  preceding  chapter. 
Managed  as  a  private  or  purely  money-making  enterprise,  it  will 
charge  the  general  range  of  rates  which  will  bring  the  maximum 
profit;  subject  to  all  those  modifications  of  the  theoretic  extremes 
of  monopoly  prices  to  which  attention  has  already  been  called.  On 
each  particular  item  or  class  of  traffic  it  will  tend  to  charge  what 
the  conditions  of  demand  make  possible  for  that  particular  kind  of 
traffic.  People  constantly  confuse  the  principle  of  joint  cost  with 
that  of  monopoly.  To  charge  what  the  traffic  will  bear  under  the 
former  principle  is  for  the  public  interest;  to  charge  what  it  will 
bear  under  the  latter  is  against  the  public  interest.  So  far  as 
monopoly  becomes  effective,  railway  rates  call  the  more  for  public 
regulation,  even  tho  the  problem  of  settling  what  is  a  "  reasonable  " 
rate  in  any  particular  case  must  remain  a  very  knotty  one. 


CHAPTER  64 
Public  Ownership  axd  Public  Control 

Section  1.  What  are  "public  service"  industries?  The  legal  conception  less 
important  than  the  economic;  the  essential  earmark  is  monopoly,  419  — 
Sec.  2.  The  spur  of  profit  necessary  for  improvements  in  the  arts;  hence 
a  preliminary  stage  of  private  ownership  is  inevitable,  423  —  Sec.  3.  The 
question  of  vested  rights  when  pubhc  ownership  displaces  private.  "Fran- 
chises" should  always  be  for  limited  terms.  Purchase  at  market  value, 
425  —  Sec.  4.  Are  there  criteria  marking  some  industries  as  suitable  for 
public  management?  The  tests  suggested  by  Jevons;  distrust  of  pubUc 
officials  underhes  them  all,  427  —  Sec.  5.  To  secure  trustworthy  and 
efficient  public  officials  is  partly  a  problem  of  pohtical  machinery.  Some 
difficulties  of  public  management,  as  regards  the  employment  of  labor  and 
the  maintenance  of  progress,  429  —  Sec.  6.  The  fundamental  requisite  in 
a  democracy  is  a  generally  high  level  of  character  and  intelligence.  In  what 
way  corruption  is  connected  with  monopoly  industries,  431  — Sec.  7.  The 
future  of  democracy  depends  on  its  success  in  dealing  with  these  indus- 
tries. Experiments  in  ownership  to  be  welcomed,  especially  in  munici- 
palities. The  prejudices  of  the  business  class  on  this  matter,  433  —  Sec.  8. 
Public  regulation  the  only  alternative  to  public  ownership.  The  two 
types  of  regulating  boards.  The  essential  object  is  to  limit  prices  and 
profits.  The  elevation  of  the  standards  of  private  management,  435  — 
Sec.  9.  The  Transportation  Act  of  1920.  Provisions  on  valuation  and 
on  rates.  A  half-way  step  toward  pubhc  ownership,  which  is  likely  to 
come  in  the  end,  437. 

§  1.  How  far  shall  public  regulation  be  carried?  To  the  point 
of  ownership  and  management  once  for  all?  These  questions, 
most  conspicuously  presented  by  railways,  become  of  greater  and 
greater  moment  in  the  modern  world,  as  large-scale  operations 
spread  and  monopoly  conditions  impend  more  and  more. 

No  doubt  there  are  some  things  which  in  the  advanced  countries 
are  by  general  consent  no  longer  in  private  hands.  Such  are  high- 
ways and  bridges,  and  elementary  education.  As  the  sense  of  the 
widespread  importance  of  some  services  becomes  stronger,  they  are 
conceived  as  no  longer  to  be  dealt  with  on  the  quid  pro  quo  prin- 
ciple; they  are  provided  gratuitously  for  every  individual,  and  the 

419 

\ 


420         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [64-§  1 

means  for  providing  them  are  raised  by  taxation. i  They  are  then 
necessarily  suppHed  by  general  levy  and  under  public  management. 
The  doubtful  questions  are  as  to  those  services  which  are  still  ren- 
dered essentially  on  the  quid  pro  quo  principle,  as  in  the  case  of  the 
post  office  with  its  rates  for  postage;  a  municipal  water  service 
with  its  water  rates;  a  state  railway  with  its  passenger  fares  and 
freight  charges.  These  institutions  may  be  in  private  hands,  and 
if  in  public  hands,  they  present  problems  very  different  from  those 
of  education  and  of  ordinary  highways.  And,  to  repeat,  the  ques- 
tion arises,  which  among  them  are  properly  subjects  for  public 
management? 

The  doubtful  industries  are  those  commonly  designated,  espe- 
cially in  this  country,  as  "public  service  industries,"  such  as  rail- 
ways, the  telephone  and  telegraph,  the  supply  of  water,  gas,  elec- 
tricity. The  phrase  "public  service"  is  a  question  begging  one, 
implying  as  it  does  that  a  clear  and  simple  line  of  demarcation  can 
be  drawn  between  the  operations  that  are  and  those  that  are  not 
appropriate  for  public  management  and  control.  Such  industries 
as  have  just  been  mentioned  are  "public"  in  two  senses.  The  one 
is  legal,  and  comparatively  easy  to  define.  The  other  is  economic 
and  more  important,  but  more  difficult  of  precise  application;  it 
rests  on  the  character  of  the  industries  as  monopolies. 

A  railway  cannot  be  built  unless  there  is  legislation  for  acquir- 
ing its  right  of  way.  Without  the  right  to  take  land  at  a  valuation 
—  the  right  of  eminent  domain  —  it  could  be  blackmailed  or 
blocked  by  any  landowner  along  its  route.  A  gas  company,  again, 
needs  the  right  to  dig  up  the  streets,  an  electric  company  similar 
rights  to  use  or  cross  the  streets.  A  street-car  company  ipso  facto 
uses  the  public  highways.  Hence  these  are  in  special  degree  de- 
pendent on  public  authorization,  and  so  subjected  with  compara- 
tive ease  to  public  control. 

But  it  does  not  follow  from  this  characteristic  alone  that  they 
should  be  managed  by  the  public,  or  even  subjected  in  any  special 
degree  to  public  control.  The  real  reason  for  treating  them  as 
"public  service"  industries,  in  the  sense  that  they  call  for  public 

1  Cp.  Chapter  68,  §  1. 


64-§  1]  PUBLIC  OWNERSHIP  AND  CONTROL  421 

control,  is  economic,  not  legal;  and  the  fundamental  economic  rea- 
son is  that  they  tend  to  be  monopolies.  If  competition  were  effec- 
tive in  them,  as  it  is  in  the  supply  of  boots  and  clothing  and  flour, 
the  fact  that  some  use  of  the  highways  was  necessary  would  not  Le 
thought  to  entail  public  regulation;  any  more  than  the  fact  that  the 
streets  are  used  by  cabs  and  omnibuses,  hawkers  and  street  venders, 
brings  these  within  the  public  service  class.  On  the  other  hand, 
even  tho  there  be  no  need  of  specific  authorization,  no  grant  of 
special  powers  or  "franchise,"  no  obvious  means  of  control,  any 
industry  which  reaches  the  full-fledged  monopoly  stage  calls  for 
regulation  and  suggests  at  least  the  possibility  of  public  ownership. 
If  flour  making  or  bread  making  were  in  the  hands  of  a  tight  com- 
bination, we  should  soon  hear  it  dubbed  a  public  service  industry. 
It  is  a  public  service  industry  in  the  sense  of  being  of  vast  impor- 
tance for  all  the  public.  But  it  does  not  call  for  regulation  so  long 
as  competition  is  sufficiently  effective  in  it.  Water  supply  is  a  pub- 
lic industry  in  every  sense:  legislative  authority  is  indispensable, 
the  industry  is  supremely  important,  it  has  monopoly  character. 

Tho  the  extent  to  which  combination  or  monopoly  will  proceed 
among  modern  industries  is  uncertain,  it  is  clear  that  it  will  extend 
far.  That  the  industries  now  commonly  called  "public  utilities" 
belong  in  the  monopoly  class,  w^as  not  at  first  seen  in  the  L^nited 
States.  Competition  was  invoked  in  the  early  days  as  the  means 
of  regulating  their  charges.  Rival  railways,  rival  street  railways 
and  gas  companies  were  welcomed,  and  the  belief  w^as  entertained 
that  here,  as  in  other  industries,  competition  would  suffice  to  make 
charges  reasonable.  How  many  American  cities  have  had  compet- 
ing street  railways  and  gas  companies  and  telephone  companies, 
with  promises  of  lower  charges  and  better  service;  and  how 
infallibly  have  the  competitors  in  the  end  got  together  in  a  tight 
combination!  Notwithstanding  repeated  experience  of  this  sort, 
an  illusory  hope  is  still  cherished  in  many  cases  as  to  the  eSicacy 
of  competition.  The  simple  and  obvious  fact  is  that  monopoly 
inevitably  ensues.  The  need  of  regulation  in  some  other  way 
than  thru  competition  must  be  faced  once  for  all. 

The  cause  of  monopoly  in  many  of  these  cases  (tho  not  in  all)  is 


422         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [64- §  1 

strictly  economic:  namely,  that  the  industries  are  conducted  under 
the  conditions  of  increasing  returns.^  So  with  the  railway;  tho 
probably  the  rate  of  increase  diminishes  as  the  railway  system  en- 
larges. When  power  superseded  animals  in  street-railway  traction, 
the  same  became  true  of  this  industry.  Electric  light  and  power, 
gas  and  water,  all  are  more  cheaply  supplied  if  one  unified  plant 
serves  a  single  large  area.  In  such  cases  the  words  prophetically 
used  by  John  Stuart  Mill,  in  the  early  days  of  the  present  industrial 
regime,  are  as  true  as  they  were  sixtj-  years  ago :  "  When  a  business 
of  real  public  importance  can  only  be  carried  on  advantageously 
upon  so  large  a  scale  as  to  render  the  liberty  of  competition  almost 
illusory,  it  is  an  unthrifty  dispensation  of  the  public  resources  that 
several  costly  sets  of  arrangements  should  be  kept  up  for  the  pur- 
pose of  rendering  the  community  this  one  service.  It  is  much  bet- 
ter to  treat  it  at  once  as  a  public  function ;  and  if  it  be  not  such  as 
government  itself  could  beneficially  undertake,  it  should  be  made 
over  entire  to  the  company  or  association  which  will  perform  it  on 
the  best  terms  for  the  public."  ^ 

The  post  office  and  the  telephone  and  telegraph  are  best  managed 
under  monopoly  conditions  for  reasons  which  in  part  are  different. 
They  are  much  more  useful  to  the  public  if  all-embracing  and  singly 
managed.  It  is  conceivable  that  letter  service  should  be  handled 
by  one  set  of  companies  in  the  cities,  and  by  another  set  in  the 
country.  The  rates  could  be,  and  probably  would  be,  lower  in 
urban  districts,  if  these  were  separately  supplied ;  and  it  may  be  a 
question  whether  the  present  uniform  rate,  yielding  high  profits  in 
the  cities,  is  in  accord  with  current  traditions  on  the  equitable  rela- 
tion between  cost  and  price.  But  the  enormous  convenience  of 
being  able  to  reach  any  and  every  correspondent  once  for  all,  at  a 
simple  fixed  rate,  outweighs  any  possible  doubt  as  to  the  equity  of 
the  uniform  rate.'    To  this,  of  course,  must  be  added,  in  the  case 

1  That  is,  increasing  returns  due  to  "internal"  economics.     See  Chapter  14,  §  3. 

2  Mill,  Principles  of  Political  Economy,  Book  I,  Chapter  IX,  §  4. 

3  The  expense  of  the  post  office  is  largely  for  collecting,  handling,  sorting.  These 
items  are  the  same  for  every  letter  in  a  given  district.  Mere  transportation  costs 
comparatively  little.  Hence  a  uniform  charge,  irrespective  of  distance,  is  not  so  far 
out  of  accord  with  cost  as  at  first  it  seems.     This  was  among  the  main  grounds  on 


64^§2]  PUBLIC  OWNERSHIP  AND  CONTROL  423 

of  the  post  office,  the  educational  and  political  gains  from  a  uni- 
form rate  and  an  all-inclusive  service.  In  the  case  of  the  telephone, 
the  advantage  of  unified  service  is  most  conspicuous  of  all.  The 
essence  of  effective  telephone  service  is  to  be  able  to  talk  to  any  and 
every  subscriber.  Competing  telephones,  each  having  its  own  set 
of  subscribers,  are  the  height  of  absurdity.  The  elimination  of 
competition  is  here  not  only  inevitable,  but  unquestionably^  bene- 
ficial. The  only  possible  question  is  whether  there  shall  be  public 
monopoly,  or  private  monopoly  regulated  by  public  authority. 

§  2.  In  virtually  all  of  these  cases,  public  ownership,  where  it 
has  been  adopted,  has  been  preceded  by  private;  and  this  for  the 
reason  that  the  spur  of  profit  is  necessary  for  the  initiation  of 
advances  in  the  arts. 

We  are  here  on  disputed  ground :  how  far  do  the  selfish  motives 
predominate,  and  how  far  must  they  be  appealed  to  for  the  further- 
ance of  material  progress?  Men  are  extraordinarily  unequal,  and 
not  least  unequal  in  the  degree  to  which  they  respond  to  altruistic 
impulses.  Among  men  of  genius  —  great  painters,  poets,  musi- 
cians, men  of  science  —  the  coarser  motives  are  often  veiled  or  over- 
borne. In  them,  the  inborn  instinct  is  strong;  they  work  not 
primarily  for  reward,  but  because  the  bent  is  irresistible.  So  it  is  to 
a  large  extent  with  inventors.  But  these  are  highly  exceptional  per- 
sons. For  the  vast  majority  of  men,  the  argument  from  the  bribe 
holds.  The  prospect  of  gain  is  immensely  powerful  in  bringing 
men  to  exercise  their  faculties  to  the  utmost  pitch.  This  is  the 
case  in  no  small  degree  even  with  those  of  highest  genius.  It  is 
more  markedly  the  case  as  we  descend  from  this  very  small  set  to 
the  much  larger  class  of  able,  but  not  brilliant  men.  For  all  except 
the  very  few  of  extraordinary  gifts,  the  spur  of  gain  is  not  only 
powerful,  it  is  indispensable.     Almost  all  inventors  and  men  of 

which  Rowland  Hill  argued  for  his  great  reform  (penny  postage).  In  a  compara- 
tively small  and  densely  settled  country,  a  uniform  postage  rate  thus  rests  on  an 
economic  as  well  as  on  a  social  basis.  In  a  vast  country  like  the  United  States,  the 
economic  reasons  are  less  strong.  Distance  and  cost  of  transportation  count  for  more 
in  the  expenses,  especially  where  not  only  letters  are  carried,  but  bulky  printed  and 
miscellaneous  matter.  Uniformity  of  charge,  like  the  extension  of  free  delivery 
into  sparsely  settled  country  districts,  can  be  justified  chiefly  on  larger  social, 
grounds. 


424         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [64-§2 

science  are  subject  to  the  self-regarding  motives  which  affect  so 
profoundly  the  life  about  them.  They  work  the  more  strenuously 
and  effectively  in  proportion  to  the  expected  reward.  This  is  the 
principle  underlying  the  whole  system  of  patents,  copyrights,  and 
trade-marks,  nay,  the  whole  system  of  competitive  industry  and 
private  property. 

Further,  for  the  progress  of  industry,  there  must  be  not  only  in- 
ventors and  managers,  but  persons  willing  to  venture  their  means 
in  new  ways.  The  history  of  all  the  great  advances  in  the  arts, 
especially  the  epoch-making  changes  of  modern  times,  shows  that 
the  business  man  and  venturesome  capitalist  have  played  an  es- 
sential part.  We  are  apt  to  think  of  successful  inventions  as  made 
once  for  all  at  a  precise  date  by  one  individual.  In  fact,  there  has 
been  almost  invariably  a  long  period  of  experiment  by  many  per- 
sons —  rival  projects  and  false  starts,  disappointing  trials,  slow 
emergence  of  the  finally  successful  device.  The  steam  engine,  the 
textile  inventions  of  the  Industrial  Revolution,  the  railway,  electric 
traction,  flying  machines,  all  went  thru  this  stage  of  uncertainty. 
To  select  among  the  rival  schemes,  and  to  venture  boldly  on  new 
investments,  the  business  man  is  as  necessary  as  the  inventor. 
Sometimes,  as  in  the  cases  of  Stephenson  and  Siemens,  the  in- 
ventor is  also  a  business  man.  More  often  —  as  in  the  typical  case 
of  Boulton  and  Watt  —  the  two  sorts  of  ability  must  be  combined 
in  a  partnership;  the  inventor  needs  the  backing  and  guidance  of 
the  managing  capitalist. 

The  history  of  the  past  shows  the  spur  of  profit  to  have  been  at 
work,  and  apparently  indispensable,  in  all  the  industries  of  the  sort 
we  are  now  considering.  Private  management  has  been  a  neces- 
sary stage.  Public  management  has  come  as  a  transition  and  a 
growth,  not  by  an  independent  start.  \Miere  indeed  an  industry 
has  been  developed  by  private  activit}^  in  one  country,  it  may  be 
transplanted  to  another  without  the  preliminary  stage.  WTien  the 
railway,  after  a  long  period  of  experiment,  had  been  brought  into 
effective  working  order  in  England,  it  was  easy  to  introduce  it  on 
the  Continent  as  a  state  industry.^    A  generation  later,  it  was  easy 

iMost  railways  on  the  Continent,  none  the  less,  were  built,  and  at  the  outset 
managed  by  private  companies.     The  first  construction  was  usually  undertaken  by 


64-§3]  PUBLIC  OWNERSHIP  AND  CONTROL  425 

for  the  Australian  colonies  to  undertake  public  management  of  rail- 
ways, by  importing  from  England  men  trained  in  the  school  of  pri- 
vate management.  Electric  traction  for  urban  transportation  was 
easily  started  in  England  as  a  public  business,  after  private  enter- 
prise in  the  United  States  had  shown  how  the  thing  could  be  done. 

The  probabilities  are  that  the  same  course  will  be  followed  in  the 
future.  The  present  state  of  water-power  transmission  thru  elec- 
tricity supplies  an  instructive  illustration.  Here  are  great  possi- 
bilities, nay,  great  certainties.  The  simple  matter  of  building 
dams  and  impounding  the  water  can  indeed  be  done  by  the  state. 
But  the  hydraulic  and  electric  plant,  and  the  transmission  and  dis- 
tribution of  the  power,  involve  risks  and  call  for  enterprise  and 
vigor  (not  to  mention  technical  progress)  such  as  public  officials  are 
not  likely  to  supply.  The  utilization  of  water  power  thru  elec- 
tricity thus  waits  on  private  initiative  and  management.  Ob- 
viously, a  monopoly  situation  exists,  or  at  all  events  impends;  here 
is  just  so  much  power,  and  he  who  controls  it  controls  all  the  indus- 
trial possibilities.  The  public  should  never  give  away  in  perpetu- 
ity the  ownership  of  this  great  resource.  Yet  it  can  probably 
secure  its  effective  development  only  by  allowing  scope  for  private 
profit.  It  is  at  a  later  stage,  when  the  best  ways  of  utilizing  the 
power  have  come  to  be  understood,  that  public  management  may 
take  the  place  of  private. 

§  3.  When  the  transition  from  private  ownership  and  manage- 
ment takes  place,  the  question  of  vested  rights  will  always  arise. 
The  terms  of  purchase  must  not  be  such  as  to  deter  future  invest- 
ment in  other  enterprises.  But,  on  the  other  hand,  only  so  much 
should  be  paid  as  is  necessary  to  keep  alive  the  spirit  of  private 
management  and  investment.  The  bribe  should  not  be  larger  than 
suffices.  Naturally,  the  recipient  tries  to  get  more  —  unlimited 
franchise  at  the  start,  and  at  the  later  stage  purchase  at  the  top 
price.  The  financial  markets  will  capitalize  his  earnings,  however 
high,  and  he  will  expect  purchase  at  the  capitalized  ^^alue. 

It  is  the  first  and  simplest  canon  of  public  policy  in  these  matters 

English  contractors,  among  whom  the  Stephensons  and  Brassey  were  conspicuous. 
In  the  United  States,  the  railway  grew  independently,  and  thruout  by  private 
enterprise. 


426         PROBLEMS  OF  ECONOMIC  ORGANIZATION      l64-§3 

that  there  should  be  no  unUmited  franchises.  Whether  the  question 
be  of  railways  or  street  railways  or  gas  works  or  telephones  or  water 
power,  the  right  to  establish  and  conduct  the  industry  in  private 
hands,  and  the  needed  authorization  from  the  law,  should  be  for  a 
limited  term.  There  should  be,  too,  a  reserved  privilege  of  pur- 
chase at  terms  based  on  the  cost  of  the  plant,  not  on  the  capitalized 
value  of  its  earnings.  Experience  shows  that  a  period  of  thirty 
years,  certainly  one  of  fifty  years,  is  long  enough,  and  that  a  right 
of  purchase  on  reasonable  terms  does  not  deter  private  investment. 

In  this  respect,  our  American  communities  have  been  reckless 
of  posterity.  The}'  have  sold  their  birthright  for  a  song,  or  have 
simply  given  it  away.  The  explanation  is  obvious  enough.  In 
the  pioneer  days  one  of  the  main  objects  of  the  early  settlers  is  to 
possess  themselves  of  the  very  things  that  will  become  valuable  in 
the  future  —  land,  urban  sites,  mines,  forests,  water  power,  "  fran- 
chises." No  one  then  thinks  of  conserving  the  rights  of  posterity; 
nearly  every  one  wishes  to  appropriate  at  once  those  things  for 
which  posterity  may  pay  a  large  price.  Only  a  stringent  prohibi- 
tion, by  constitutional  enactment  or  from  an  outside  power  (Con- 
gress as  to  the  Territories),  will  keep  a  pioneer  community  from 
such  appropriation  of  the  possibilities  of  the  future. 

When  the  mistake  has  been  made  of  allowing  the  monopoly  in- 
dustry to  get  into  unrestricted  private  ownership,  and  where  it  has 
been  sold  and  bought  by  successive  persons  on  the  basis  of  such 
ownership,  there  is  nothing  to  do,  if  the  transition  to  public  owner- 
ship is  determined  on,  except  to  buy  the  owners  out  at  the  market 
price.  The  purchase  price  must  then  be  fixed,  not  on  the  basis  of 
cost  of  investment  or  reproduction,  but  on  that  of  the  capitalized 
value  of  the  earnings.  The  case  is  the  same  as  with  land  and  urban 
sites.  If  the  community  has  sanctioned  investment  and  purchase 
on  the  basis  of  a  perpetual  franchise,  it  must  itself  buy,  as  it  has 
authorized  others  to  do,  on  the  basis  of  present  value.  At  the 
most,  it  can  conserve  for  itself  only  the  future  increase  in  the 
earnings  of  the  monopoly  or  privilege;  just  as  it  may  appropriate 
thru  taxation  the  future  increase  in  the  value  of  urban  sites.  Un- 
less all  private  property  is  wiped  away  once  for  all,  the  lawful  own- 


64- §  4]  PUBLIC  OWNERSHIP  AND  CONTROL  427 

ers  of  this  particular  kind  of  property  cannot  be  singled  out  for 
special  dispossession.  Hence,  for  example,  when  Prussia  in  1878 
resolved  on  the  epoch-making  step  of  buying  the  railways  for  the 
state,  purchase  proceeded  frankly  and  even  liberallj^  on  the  market 
value  of  the  roads.  Great  Britain  will  do  the  same  when  she  buys 
her  railwaj^s,  as  she  may  before  very  long.  The  United  States 
will  have  to  do  the  same,  if  the  time  should  come  for  that  far- 
reaching  change.  France  is  in  a  comparatively  favorable  position 
for  the  possibilities  of  the  future;  since,  under  the  terms  of  the 
original  legislation,  her  railways  are  to  pass  into  the  state's  hands 
by  the  middle  of  the  twentieth  century  (1959),  without  any  com- 
pensation at  all  for  the  permanent  plant. 

§  4.  The  preceding  discussion  has  proceeded  as  if  the  transition 
from  private  ownership  to  public  were  certain  to  come  in  the  case 
of  all  the  monopoly  industries,  and  as  if  it  were  dependent  solely 
on  the  attainment  of  a  settled  stage  of  technical  and  industrial  de- 
velopment. But  the  matter  is  not  so  simple.  Public  ownership 
may  not  come  at  all ;  or  it  may  be  preceded  by  a  long  period  of  pri- 
vate ownership  under  public  regulation.  The  conditions  on  which 
the  choice  of  policy  must  depend  are  here  not  economic  in  the  nar- 
rower sense;  they  are  mainly  social  and  political. 

There  have  been,  it  is  true,  attempts  to  formulate  certain  eco- 
nomic characteristics  by  which  the  line  between  public  and  private 
industry  can  be  drawn.  A  well-known  older  attempt  was  that  of 
Jevons,  who  stated  the  earmarks  of  an  industry  adapted  for  pub- 
lic management  to  be  the  following:  (1)  small  capital  account;  (2) 
routine  operations;  (3)  the  coordination  of  several  services,  as  the 
post,  the  telegraph  and  the  telephone ;  (4)  the  sufficiency  of  a  single 
all-embracing  plant,  as  in  the  case  of  water  and  gas  supply.  This 
enumeration,  made  at  the  time  when  the  transfer  of  the  telegraph 
to  the  state  was  under  discussion  in  England,  has  obviously  failed 
to  fit  later  exigencies.  The  very  first  requirement,  that  of  a  small 
capital  account,  is  not  met  in  the  case  of  the  railway ;  yet  here  we 
have  public  management  on  a  great  scale.  None  the  less,  the  enu- 
meration still  deserves  attention;  for  it  points  to  some  of  the 
political  difficulties  of  the  problem. 


428         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [64-§4 

Underlying  the  requirements  of  Jevons  is  a  suspicion  of  public 
officials.  This  explains  the  very  first  requirement  —  small  capi- 
tal account.  Where  the  capital  account  is  large,  the  financial  and 
technical  outcome  of  an  enterprise  is  difficult  to  judge.  The  man- 
agement may  be  good,  yet  expenditures  for  repairs  or  enlargements 
may  result  in  a  deficit  in  the  year's  account.  Conversely,  a  skimp- 
ing on  needed  repairs  and  on  improvements  for  the  plant  may 
enable  a  good  showing  to  be  made  by  a  poor  manager.  Every  per- 
son who  has  looked  into  the  accounts  of  a  railway  or  ironworks  or 
large  manufacturing  concern  knows  how  necessary  it  is  to  analj^ze 
the  figures,  and,  above  all,  to  probe  the  capital  account,  before 
judging  whether  the  management  has  been  good.  To  supervise 
public  officials  and  to  judge  whether  their  administration  has  been 
efficient,  becomes  the  more  difficult  as  plant  is  larger  and  more 
complex.  The  more  one  is  disposed  to  entertain  general  doubt  as 
to  the  probable  success  of  public  officials,  the  more  is  one  averse  to 
intrusting  such  business  to  their  hands. 

Something  of  the  same  sort  holds  of  a  routine  character  of  the 
operations.  This  also  makes  supervision  easier.  Where  adminis- 
tration can  be  reduced  to  set  rules,  it  is  easily  seen  whether  these 
have  been  followed  For  the  same  reason  it  is  sometimes  said  (as 
it  was  by  Jevons)  that  an  industry  is  more  likely  to  be  well  con- 
ducted by  the  state  if  its  operations  are  constantly  under  every 
one's  eye.  The  post  office  fulfills  all  such  requirements;  indeed, 
this  case  doubtless  suggested  the  criterion.  If  we  start  with  the 
premise  that  public  officials  are  to  be  mistrusted  and  must  be  con- 
stantly under  w^atch,  we  end  with  limitations  on  state  manage- 
ment such  as  Jevons  suggested. 

Now  the  question  whethe  public  officials  need  to  be  constantly 
watched  depends  on  their  character  and  quality;  and  this,  again, 
in  a  democracy  depends  ultimately  on  the  character  and  quality 
of  the  electorate  or  other  body  that  chooses  them.  If  we  are  sure 
of  the  probity  and  ability  of  the  officials,  we  may  turn  over  to  them 
for  management  a  very  wide  range  of  industrial  operations.  We 
need  not  hesitate  because  the  capital  account  is  large,  or  because 
the  operations  are  irregular  and  complex,  or  are  concealed  from  the 


64-§5]  PUBLIC  OWNERSHIP  AND  CONTROL  429 

public  eye.  We  may  intrust  to  them  the  management  of  all  the 
monopoly  industries  which  have  passed  the  formative  and  experi- 
mental stage,  and  in  which  the  technical  conditions  have  become 
fairly  settled. 

To  sum  up:  the  strictly  economic  earmarks  for  state-managed 
industries  are  maturity  and  monopoly.  But  the  state  means  state 
officials;  and  whether  these  are  competent  to  take  charge  is  a 
troublesome  political  and  social  problem. 

§  5.  Two  things  are  necessary  for  the  securement  of  an  efficient 
body  of  public  servants:  first,  well-devised  political  institutions; 
and  second  —  above  all  in  a  democracy  —  a  sufficiently  high  level 
of  intelligence  in  the  great  mass  of  the  community. 

Not  a  little  depends  on  tradition  and  habit.  The  spoils  system 
is  largely  a  bad  habit.  LTntil  it  is  rooted  out,  good  public  man- 
agement is  hopeless.  The  bureaucracy  of  Germany  has  the  sup- 
port of  ancient  traditions,  long  bound  up  with  devotion  to  the 
monarchical  ideal  but  likely  to  persist  whatever  the  form  of  politi- 
cal organization.  It  has  proved  an  invaluable  instrument  for  the 
successful  extension  of  state  activity.  The  British  Civil  Service 
as  it  developed  during  the  second  half  of  the  nineteenth  century, 
proved  an  instrument  not  less  efficient.  Like  the  German,  it  had  a 
certain  oligarchic  flavor,  utilizing  a  spirit  of  achievement  and  of 
service  which  had  been  nurtured  in  a  select  highly-educated  class. 
In  Great  Britain  also  that  spirit  may  be  expected  to  persist  under 
altered  political  conditions.  Our  American  principles  of  checks  and 
balances,  of  limited  powers  and  divided  responsibilities,  work 
against  efficient  public  management.  Our  traditions  have  been 
inherited  from  the  days  when  the  would-be  absolutist  was  at  the 
head  of  the  state,  and  when  state  officials  were  suspected  of  attacks 
on  liberty.  We  are  slowly  coming  to  recognize  that  the  state  may 
be  a  great  agent  for  social  uplift,  and  that  its  officials  need 
more  freedom  of  action,  less  fetters  on  action.  In  municipal 
government,  where  the  situation  is  worst,  the  goal  of  reformers  is 
the  elimination  of  the  wheels  within  wheels,  concentration  of 
responsibility,  diminution  of  the  number  of  elective  officers  and 
lengthening  of  their  terms,  permanent  tenure  for  the  routine  staff 


430         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [64'-§5 

and  for  the  trained  experts.  In  all  these  respects,  habits  of 
thought  are  slowly  changing,  and  the  way  is  being  prepared  for  at 
least  the  possibilities  of  better  things. 

The  employment  of  public  laborers  in  a  democracy  is  always  a 
thorny  problem.  They  strive  to  become  a  favored  class,  w^ith  ex- 
tra pay  and  extra  privileges.  As  has  already  been  said,i  other 
laborers  commonly  support  them  in  such  endeavors,  from  a  con- 
fused notion  that  the  process  will  raise  wages  and  privileges  gener- 
ally. Elected  officials,  on  the  other  hand,  are  apt  to  accede  to 
their  demands;  for  this  compact  body  of  voters  needs  to  be  concili- 
ated. At  its  worst,  the  employment  of  large  bodies  of  laborers 
means  a  political  machine  and  political  corruption.  Even  at  its 
best,  it  is  likely  to  bring  place-making  and  easy  stints;  hence,  in- 
efficiency and  expense. 

Private  industry  has  a  quasi-automatic  check  to  this  evil.  The 
manager  looks  to  money-making,  and  will  pay  his  labor  no  more 
than  he  can  get  it  for;  that  is,  no  more  than  other  labor  secures. 
The  public  official,  on  the  other  hand,  is  not  rigorously  subject  to 
the  test  of  profits ;  he  can  dip  into  the  apparently  bottomless  pub- 
lic purse.  The  state  should  be  a  model  employer,  and  should  set 
an  example  of  good  wages,  moderate  hours,  steady  emplo^Tnent, 
humane  surroundings.  But  the  state  should  set  also  an  example 
of  requiring  for  its  full  day's  pay  a  full  day's  work.  The  ideal  of 
too  many  people  is  that  it  should  be  generous  with  the  pay,  but 
easy-going  with  the  work.  There  is  a  world  of  significance  in  the 
Australian  phrase  —  "the  government  stroke."  A  public  official 
in  a  democracy  always  finds  it  difficult  to  exercise  the  power  of  dis- 
charge, above  all  to  prevent  conduct  that  is  simply  slack  and  dil- 
atory. 

The  maintenance  of  progress  in  the  arts  is  another  difficult 
matter  under  public  management.  Technical  maturity  is  never 
reached  completely;  fiu-ther  advance  is  always  possible.  There  is 
indeed  a  wide  difference  between  the  early  stage  of  uncertainty 
and  experiment,  and  the  later  stage  of  gradual  improvement  on 
established  lines.    The  railway,  for  example,  is  still  being  made 

1  See  Chapter  47,  §  1. 


64-§6]  PUBLIC  OWNERSHIP  AND  CONTROL  431 

more  efficient;  but  the  great  lines  of  technical  and  economic  proce- 
dure seem  to  have  been  definitively  marked  out.  Tho  the  applica- 
tion of  electricity  to  traction  may  bring  great  changes  in  railway 
transportation,  there  will  be  none  so  revolutionary  as  those  in  the 
early  period  of  invention  and  development.  Nevertheless,  in  rail- 
ways as  in  other  industries,  even  when  they  have  reached  a  compar- 
atively settled  stage,  public  management,  to  be  fully  satisfactory, 
should  not  be  content  with  doing  passably  w^ell  what  the  world  has 
already  learned  to  do.  The  continued  progress  which  it  should 
maintain  calls  for  keenness,  vigor,  enthusiasm,  single-minded  devo- 
tion to  professional  tasks  on  the  part  of  trained  administrators  and 
experts.  Only  an  intelligent  and  self-restrained  democracy,  or  a 
very  capable  autocracy,  can  enlist  such  men  and  get  them  to  do 
their  work  in  the  best  spirit.  The  German  Empire  and  the  German 
states,  in  their  post  office,  telegraph  and  telephone,  perhaps  in  their 
railways,  unmistakably  in  their  military  organization,  long  main- 
tained a  high  spirit  of  ambition  and  emulation.  But  the  Austra- 
lian colonies  seem  to  have  secured  simply  humdrum  management; 
honest,  to  be  sure  (and  for  this  we  in  the  L^nited  States,  to  our 
shame,  must  pay  our  tribute  of  respect),  but  devoid  of  life  and 
vigor.  No  democratic  community,  with  the  possible  exception  of 
Switzerland,  has  show^n  in  its  public  industry  a  spirit  of  progress 
comparable  to  that  of  private  industry. 

§  6.  In  the  end,  all  these  matters  of  organization  and  efficiency 
go  back  in  a  democracy  to  the  most  fundamental  of  the  requisites 
for  successful  public  management  —  the  moral  and  intellectual 
quality  of  the  community.  There  must  be  in  the  community  a 
good  average  of  character  and  conduct,  in  order  to  secure  even 
honesty  and  faithfulness;  there  must  be,  in  addition,  a  good  aver- 
age of  intelligence  and  self-restraint,  in  order  to  select  and  retain  a 
body  of  trained  and  progressive  experts.  It  is  hard  enough  to  se- 
cure the  first  of  these  things ;  it  is  very  hard  to  secure  the  second. 

We  in  the  United  States  have  still  to  learn  how  to  get  common 
honesty  and  faithful  routine.  Antiquated  political  institutions, 
excess  of  elected  officials,  lack  of  concentrated  responsibilitj^  —  all 
these  explain  a  good  deal,  and  improvement  in  these  matters  of 


432         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [64-§6 

political  machinery  promises  a  good  deal.  But  in  the  end  we  have 
to  rely  on  the  stuff  of  the  people.  A  good  electorate  will  choose 
honest  and  capable  officials,  a  debased  or  indifferent  one  will  toler- 
ate demagogs  and  thieves.  The  traditional  method  of  committee 
administration  and  scattered  responsibility  has  often  been  held 
accountable  for  the  evils  of  municipal  government  in  the  United 
States.  No  doubt  it  has  had  its  ill  effects.  But  it  is  striking  that 
a  very  similar  system  in  Great  Britain  has  not  stood  in  the  way  of 
honest  and  efficient  administration.'  Reform  in  the  machinery  of 
municipal  government  will  avail  little  unless  the  right  persons  are 
chosen  to  run  the  machiner3\  From  this  elemental  requisite  there 
is  no  escape. 

It  is  often  said  that  corruption  in  our  municipal  and  state  affairs 
is  caused  by  private  ownership  of  the  great  monopoly  enterprises, 
and  that  public  ownership  is  the  cure.  To  reason  so  is  to  mistake 
the  occasion  for  the  cause.  The  occasion  is  the  great  fund  of  gain 
which  the  monopoly  enterprises  can  yield;  the  cause  is  political 
demoralization.  It  matters  little  whether  the  initiative  in  cor- 
rupt ways  is  taken  by  the  heads  of  the  monopoly  corporations 
or  by  the  public  officials  —  whether  the  first  step  be  bribery  or 
blackmail.  In  either  case  it  is  the  existence  of  venal  legislators 
and  administrators  that  brings  coarse  and  characterless  persons 
into  the  management  of  the  "public  service"  industries.  Honor- 
able men  withdraw  from  the  unsavory  affairs  and  are  replaced  by 
those  less  squeamish.  The  root  of  the  difficulty  is  that  a  bad  po- 
litical situation  invites  corruption,  not  that  corruption  makes  the 
political  situation  bad. 

On  the  other  hand,  this  much  must  be  admitted:  there  is  a 
kindling  power  in  public  action.  The  sentiment  of  a  community 
can  be  aroused  toward  accomplishing  well  the  tasks  which  it  has 
set  for  itself.  It  is  absurd  to  go  so  far  as  to  say  that  there  is  an 
automatic  effect  on  the  quality  of  government  from  giving  govern- 
ment much  to  do  —  that  the  mere  assumption  of  larger  tasks  will 
make  the  body  politic  fit  for  accomplishing  them.     But  pride  can 

^  See  Lowell,  Government  of  England,  Vol.  II,  Chapters  39,  40,  esp.  p.  179;  and 
Munro,  The  Government  of  European  Cities,  282  seq.,  esp.  p.  307. 


64-§7]  PUBLIC  OWNERSHIP  AND  CONTROL  433 

be  enlisted,  especially  local  pride,  and  some  stir  may  thereby  be 
given  to  smoldering  forces  for  good. 

§  7.  It  is  not  too  much  to  say  that  the  future  of  democracy  will 
depend  on  its  success  in  dealing  with  the  problems  of  public  owner- 
ship and  regulation.  To  allow  the  great  monopoly  industries  to 
remain  without  control  in  private  hands  is  to  allow  an  iviperium 
in  imperio  —  nothing  less  than  a  plutocracy.  To  manage  them 
as  public  enterprises,  or  to  regulate  them  effectively  while  still  in 
private  hands,  calls  for  restraint,  abdication  of  the  town-meeting 
method,  intelligence  in  choosing  good  leaders,  steadfastness  in  fol- 
lowing them.  These  things  are  not  learned  in  a  day,  nor  is  there 
any  certainty  that  the  mere  increase  of  public  industrial  manage- 
ment will  cause  them  to  be  learned.  It  may  be  that  we  in  America 
shall  not  reach  for  a  long  time  the  stage  when  we  shall  be  able  to 
grapple  with  the  tasks  of  public  management.  The  ideal  solution 
is  that  the  great  monopoly  industries  should  be  under  efficient 
and  progressive  public  management;  but  he  is  sanguine  who  be- 
lieves that  the  attainment  of  this  ideal  will  come  easily  or  quickly. 

To  admit  that  a  task  is  difficult,  the  outcome  uncertain,  is  not  to 
say  that  it  should  be  given  up.  The  experiment  of  public  owner- 
ship and  operation  should  be  tried,  and  every  effort  made  to  bring  it 
to  a  successful  issue.  The  most  promising  field  would  seem  to  be 
the  municipality  of  moderate  size.  To  put  vast  industries  now 
into  the  charge  of  city  governments  like  those  *of  New  York  or 
Philadelphia  would  be  reckless.  But  cities 'of  smaller  size  may 
have  better  possibilities.  Even  tho,  in  these  also,  the  political  con- 
ditions too  often  have  been  wretched,  the  movement  for  "muni- 
cipalization "  has  better  prospects,  and  a  trial  is  to  be  welcomed.  If 
it  fails,  it  will  show  that  those  are  mistaken  who  would  make  haste 
in  adding  to  the  undertakings  of  democracy.  If  it  succeeds,  so 
much  the  better. 

Success  or  failure  in  such  experiments  cannot  be  gaged  in  a  short 
time,  nor  without  reasonable  discrimination.  Mistakes  and  dis- 
appointments will  be  inevitable  in  the  early  stages.  A  considerable 
period  must  elapse  before  it  can  be  known  whether  the  needful 
lessons  will  be  learned.     And  as  regards  the  final  outcome,  it  must 


434         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [64-§7 

be  remembered  that  the  question  will  always  be  one  of  the  balance 
of  gain.  The  opponents  of  public  ownership  are  constantly  point- 
ing to  its  weaknesses  and  its  ugly  aspects  —  slowness  and  inde- 
cision in  adopting  improvements,  placation  of  the  public  by  con- 
cessions that  make  a  show  on  the  surface  (e.g.  low  passenger  rates 
and  good  passenger  accommodations  on  railways,  to  the  neglect  of 
the  more  important  freight  service),  log-rolling,  undue  favors  to  em- 
ployees. The  real  question  is  not  whether  these  things  are  bad, 
but  whether  they  are  worse  than  the  evils  of  private  ownership. 
He  who  compares,  for  example,  the  railways  of  the  United  States 
and  Australia  will  undoubtedly  find  some  serious  defects  in  Aus- 
tralia. But  he  will  find  crying  evils  in  the  United  States.  He 
will  find  greater  efficiency  in  our  country,  but  also  tortuous 
management,  and  ominous  consequences  in  the  greater  inequality 
of  wealth;  and  he  will  not  render  an  unhesitating  verdict  against 
the  state  railways  of  Australia. 

The  business  and  well-to-do  classes  of  all  countries,  and  especially 
of  English-speaking  countries,  rarely  consider  this  subject  with  an 
open  mind.  They  listen  readily  to  all  the  evidence  that  tells 
against  public  ownership  and  are  pessimistic  about  its  prospects. 
The  persons  now  in  control  of  the  money-making  monopolies  sup- 
ply them  freely  with  all  sorts  of  distorted  information  and  super- 
ficial arguments.  In  the  United  States  more  than  anywhere  else 
their  prejudices  are  rank.  This  attitude  is  due  to  various  causes. 
In  part,  it  is  an  inlieritance  from  the  older  political  philosophy  of 
laissez-faire  and  non-interference.  In  part,  it  is  due  to  sad  experi- 
ence of  misgovernment  in  this  country.  But  to  no  small  degree  it 
arises  from  a  lurking  fear  of  dispossession.  Public  management  is 
"socialistic";  it  is  feared  as  the  entering  wedge  to  complete  expro- 
priation. 

The  relation  of  the  problems  of  public  ownership  to  socialism 
will  be  considered  elsewhere.^  But  this  much  may  be  said  at  once: 
private  property  is  more  likely  to  maintain  itself  if  it  is  coupled 
with  an  extension  of  public  regulation.  It  will  be  more  secure  if 
its  abuses  are  done  away  with,  and  if  the  avoidable  causes  of  great 

1  See  Chapter  66,  §  5. 


64-§8]  PUBLIC  OWNERSHIP  AND  CONTROL  435 

inequalities  are  removed.  Public  ownership  of  the  monopoly 
industries,  or  the  alte  native  of  public  regulation,  may  be  called 
conservative  in  the  sense  of  possibly  obviating  changes  really 
revolutionary. 

§  8.  The  clear  alternative,  then,  and  the  only  alternative,  to 
public  management  is  public  regulation.  Ideally,  regulation  is  less 
good,  but  practically  it  may  be  much  better.  Reasonably  suc- 
cessful regulation  is  more  easy  to  attain  than  reasonably  successful 
public  management. 

Some  matters  of  political  machinery  need  attention  in  this  case, 
as  in  that  of  direct  management..  The  success  of  regulation  de- 
pends on  the  quality  of  the  individuals  who  are  to  regulate.  They 
should  have  stable  tenure  of  office  and  adequate  salaries.  They 
should  be  chosen  not  by  popular  election,  but  by  executive  appoint- 
ment. These  are  simple  requisites,  too  often  neglected  in  our 
American  states.  But  the  problem  of  finding  and  retaining  good 
men  on  regulating  boards  or  commissions  is  vastly  easier  than  that 
of  finding  and  retaining  men  capable  of  efficient  management. 

Two  distinct  types  of  board  or  commission  have  appeared  in 
American  experience:  the  commission  for  investigation  and  rec- 
ommendation, relying  chiefly  on  publicity;  and  that  with  power 
of  command.  The  first  type,  of  which  the  Massachusetts  railroad 
commission  was  the  earliest  and  the  best-known  example,  was 
commended  for  a  long  time  by  the  sober  American  observers. 
None  the  less,  the  second  t\'pe  gradually  came  to  prevail.  Inves- 
tigation and  publicity  can  do  a  great  deal,  but  not  everything  that 
is  needed.  The  milder  form  of  regulation  was  a  natural  first  step, 
when  people  were  still  timorous  about  state  interference.  As  they 
have  become  used  to  it,  and  as  the  growth  of  monopoly  has  ap- 
peared more  clearlj^  to  call  for  regulation,  commissions  of  the  sec- 
ond, more  drastic,  type  have  been  generally  established.  In  Massa- 
chusetts itself  the  authority  of  the  railroad  commission  gradually 
extended  beyond  investigation  and  recommendation;  and  the  later 
commission  of  this  state,  with  jurisdiction  extended  to  all  the 
"public  service"  industries,  was  also  given  large  powers  on  the 
crucial  question  of  the  prices  to  be  charged. 


436         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [64-§8 

All  the  modes  of  regulation,  whether  by  supervision,  publicity, 
or  unqualified  prescription,  look  to  the  same  end :  control  of  prices 
and  of  profits.  Sooner  or  later  such  control  is  likely  to  be  under- 
taken directly  as  well  as  indirectly.  People  of  conservative  tem- 
per smell  confiscation  in  it;  yet  it  is  all  involved  in  those  first  steps 
of  investigation  and  publicity  which  they  commonly  approve. 
Reforms  of  this  sort  proceed  by  stages  which  follow  the  slow 
growth  of  public  opinion,  the  meaning  and  probable  outcome  being 
concealed  at  the  outset  by  ambiguous  phrases  and  mild  measures. 

Direct  control  may  be  of  prices  or  of  profits,  or  of  both.  Like 
the  control  of  capitalization,  it  should  have  a  reasonably  liberal 
regard  to  the  returns  of  investors  and  managers,  and  must  content 
itself  with  results  satisfactory  on  the  whole.  Prices  seem  on  the 
whole  easier  to  regulate  than  profits.  Restriction  of  profits,  i.e.  of 
dividends,  may  be  evaded  by  extravagant  salaries  and  bonuses. 
Even  when  not  so  evaded,  it  removes  the  stimulus  to  efficiency 
and  progress.  Prices,  it  is  true,  are  not  so  easily  fixed  at  a  "rea- 
sonable" point  as  is  a  rate  of  dividend  on  capital.  Some  knowl- 
edge of  cost  of  production  and  of  technical  details  is  called  for.  Ill 
such  industries  as  that  of  railway  transportation,  there  are  peculiar 
difficulties,  already  pointed  out.i  The  need  of  a  trained  body  of 
permanent  public  officials  is  obvious.  But  the  fact  that  their  task 
is  difficult,  and  that  only  an  approximation  to  an  ideal  solution  is 
attainable,  is  no  reason  w  hy  the  task  should  not  be  undertaken  at 
all.  All  the  truths  of  economics  are  approximations,  and  all  its 
ideals  can  be  attained  only  in  the  rough. 

Not  the  least  of  the  things  which  public  regulation  should  try  to 
accomplish  is  the  elevation  of  the  standards  of  private  manage- 
ment. The  speculative  promoter,  the  stockjobber,  the  unscru- 
pulous corrupter,  should  be  crowded  out,  and  the  business  leader 
of  the  better  type  brought  in.  To  this  end  publicity  will  do  much; 
and  pressure  will  do  much,  too.  Let  it  be  made  a  paying  policy 
to  have  honest  and  far-sighted  management,  content  with  moderate 
but  sustained  profits,  and  considerate  in  its  dealings  with  the  com- 
munity. There  are  able  business  men  in  plenty  to  whom  manage- 
»  See  Chapter  62,  §§3,  5. 


64-§  9]  PUBLIC  OWNERSHIP  AND  CONTROL  437 

ment  of  this  sort  appeals.  There  is  no  harm  in  mixed  motives,  and 
some  mixture  of  pubHc  spirit  and  private  interest  is  a  remedy  worth 
trying.  The  now-pervading  conviction  that  these  are  not  strictly 
private  industries,  and  that  the  people  in  charge  of  them  have 
duties  to  the  community  as  well  as  to  the  investors,  leads  to  a  very 
different  attitude  from  that  of  a  generation  ago.  The  public  is  no 
longer  damned.  Pressure  thru  publicity  and  thru  threat  of  legis- 
lation or  forfeiture  of  charters,  plans  for  direct  public  ownership, 
demagogs'  attacks,  if  you  please  —  all  strengthen  the  better  atti- 
tude.    Let  it  be  made  worth  while  to  please  the  public. 

§  9.  We  return,  in  concluding  this  subject,  to  the  railway  situ- 
ation in  the  United  States.  The  policy  adopted  for  the  railways 
is  likely  to  be  followed  for  all  the  industries  that  present  the  prob- 
lem of  public  management. 

The  Interstate  Commerce  Act  of  1887  was  the  first  step  toward 
the  effective  control  of  railways  and  of  railway  rates.  It  is  not 
within  the  scope  of  this  book  to  consider  its  details  or  those  of  the 
series  of  measures  that  followed  and  supplemented  it.  We  must 
content  ourselves  with  noting  some  salient  features  bearing  on  the 
general  problem. 

Control  over  rates  by  the  Interstate  Commerce  Commission, 
established  under  the  act  of  1887,  became  effective,  and  indeed 
became  more  rigorous  than  had  been  expected,  because  of  an  un- 
expected circumstance  —  the  upward  movement  of  prices  which 
took  place  during  the  first  decade  of  the  twentieth  century.  Tho 
the  Commission  had  power  both  to  reduce  rates  when  deemed  too 
high  and  to  keep  them  unchanged  when  deemed  high  enough,  it 
was  the  latter  process  which  proved  of  substantial  efficacy.  Re- 
duction could  not  be  ordered  without  detailed  investigation  of  the 
specific  cases,  followed  by  semi-judicial  procedure.  Delays  in 
dealing  with  these  intricate  matters  were  inevitable;  a  great  mass 
of  charges  were  necessarily  left  untouched  which  might  have  been 
found  too  high  if  probed.  Only  sporadic  reductions  could  be 
effected.  But  it  was  comparatively  easy  to  exercise  over  a  great 
range  of  rates  the  power  of  keeping  them  as  they  were  —  of  vetoing 
advances.     Here  the  inevitable  delays  served  as  a  brake  on  the 


438         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [64-§9 

railways,  not  on  the  Commission.  Precisely  this  proved  to  be  the 
characteristic  feature  of  the  period  of  rising  prices.  The  railways 
had  to  pay  more  and  more  for  materials  and  labor;  but  their  rates 
could  not  be  raised  without  the  sanction  of  the  Commission. 

Not  only  was  this  an  unexpected  turn  in  prices  and  rates,  but 
the  consequences,  welcome  in  themselves  to  those  who  believed  the 
railways  should  be  curbed,  were  allowed  to  drift  further  than  ex- 
pected or  intended  by  anyone.  The  margin  between  the  railways' 
outlays  and  their  receipts  from  operations,  steadily  grew  less  and 
less.  Gradually  a  situation  developed  in  which  the  country  had 
the  advantages  neither  of  private  nor  of  public  management. 
Private  management  was  almost  stifled.  Enlargement  of  the 
railway  ceased;  facilities  and  equipment  were  kept  within  the 
minimum;  the  future  was  left  to  take  care  of  itself.  Yet  the 
general  rate  structure  and  the  general  principles  of  management 
remained  those  of  an  industry  primarily  directed  to  getting  profits. 

Something  like  an  impasse  had  been  reached  even  before  the 
country  entered  on  the  Great  War.  When  it  did  so,  in  1917; 
when  the  rise  in  prices  and  wages  became  suddenly  accentuated, 
and  at  the  same  time  the  transportation  needs  for  war  purposes 
were  suddenly  intensified  —  there  was  nothing  to  do  except  for  the 
government  to  take  over  the  operation  of  the  railroads.  Without 
this  emergency  step,  the  railroads  would  have  been  bankrupted; 
and  without  it  they  could  not  have  met  the  military  exigencies. 
From  the  close  of  1917  to  the  early  part  of  1920,  a  period  of  a  httle 
more  than  two  years,  the  federal  government  managed  the  rail- 
roads. 

What  might  have  been  the  consequences  if  the  war  had  lasted 
long,  it  is  as  difficult  to  say  as  it  is  for  the  other  extraordinary  events 
of  this  period  —  the  monetary  expansion,  the  tax  changes,  the  reg- 
ulation of  industry.  When  the  war  ended,  in  the  autumn  of  1918, 
it  was  inevitable  that  there  should  be  a  revulsion  from  the  various 
emergency  measures.  By  general  consent  the  railroads  were 
returned  by  the  government  to  their  owners.  But  the  return  took 
place  under  conditions  very  different  from  those  of  the  preceding 
period;  and  the  outcome  was  a  situation  of  quite  a  different  char- 


64-§9]  PUBLIC  OWNERSHIP  AND  CONTROL  439 

acter  from  that  of  pre-war  days.  The  government  undertook  on 
the  one  hand  to  control  the  raihoad  system  to  a  greater  extent  than 
before,  on  the  other  hand  to  safeguard  the  private  owners  more  than 
ever  before. 

The  Transportation  Act  of  1920  gave  the  Interstate  Commerce 
Commission  greatly  increased  power.  Not  only  was  its  control 
over  rates  maintained ;  it  was  also  given  large  control  over  organ- 
ization and  managsmjgnt.  Most  Important  in  this  latter  regard 
was  the  authority  to  comp.eLthe.x?onso],idation.of  the  railways  into 
large^  competing  systems,  whose  make-up  was  arranged  by  the 
Commission  itself.  On  the  other  hand,  the  Commission  was  di- 
rected so  to  fix  the  general  range  of  rates  as  to  assure  to  the  railroads 
a  "fair"  return;  a  fair  return  being  provisionally  defined  as  5§  per 
cent  on  the  ascertained  "  value"  of  the  property.  But  on  what  prin- 
ciples that  "value  "  was  to  be  ascertained,  Congress  did  not  specify. 
An  earlier  act  (of  1913)  had  directed  the  Commission  to  make  a 
v^luatiow  of  the  railroads,  the  underlying  intent  then  being  to 
ascertain  how  far  there  had  been  overcapitalization.  But  no  tests 
or  principles  of  capitalization  or  of  value  had  been  set  up;  nothing 
more  than  some  question-begging  phrases.  The  act  of  1920,  tho  it 
made  a  far-reaching  use  of  the  figure  supposed  to  represent  the 
fair  value,  left  the  principle  on  which  value  was  to  be  settled  as 
beclouded  as  before.  This  sort  of  question-begging  is  common  in 
our  legislation  to  a  degree  that  sadly  tasks  the  patience  of  the  dis- 
cerning. The  original  regulating  act  (of  1886)  prescribed,  for 
example,  that  rates  should  be  "reasonable,"  without  the  remotest 
intimation  of  any  principle  or  rule  of  "reasonableness."  The  acts 
of  1913  and  1920  provided  that  the  "property  value"  of  the  several 
railroads  should  be  ascertained;  not  only  without  a  definition  of 
value  but  with  a  prescription  that  several  divergent  and  indeed 
inconsistent  principles  should  be  observed  in  ascertaining  it.  Yet 
the  substantial  intent  was  plain  enough.  The  railways  were  to 
remain  in  private  hands ;  competition  between  the  newly-arranged 
systems  was  to  give  the  good  results  of  rivalry  in  production;  the 
owners  were  to  receive  a  moderate  return  on  a  capital-value  ascer- 
tained by  a  hit-or-miss  process  but  designed  to  be  somehow  equit- 


440         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [64-§9 

able.  In  effect,  the  new  policy  was  one  of  delegated  management: 
complete  and  all-ramifying  control,  a  fair  return  virtually  guaran- 
teed on  the  railways  as  a  whole,  and  "reasonable"  rates  prescribed 
in  the  sense  that  they  should  be  such  as  to  yield  this  fair  return 
and  no  more. 

How  long  can  such  a  system  endure?  On  the  answer  to  this 
question  depends  the  trend  of  public  policy  not  only  for  the  rail- 
roads but  for  a  great  range  of  other  industries.  It  was  freely 
recognized  in  1920  that  the  plan  then  adopted  constituted  the  last 
trial  of  private  ownership  and  operation  in  the  United  States. 
Should  it  not  prove  successful,  the  next  step  must  be  public  owner- 
ship once  for  all.  My  own  judgment  is  that  ultimately  this  step 
will  be  taken  and  should  be  taken.  The  march  toward  public 
management  may  indeed  be  slow.  A  half-way  plan  like  that  es- 
tablished in  1920  may  endure  for  a  considerable  period.  But  the 
radical  change  will  come  in  the  end.  Just  as  supervision  and 
control  by  commissions  began  modestly,  first  with  mere  supervision 
and  publicity,  then  with  growing  control,  finally  with  regulation  of 
minute  details  as  well  as  of  the  general  rate  of  return  on  capital; 
so  the  plan  of  delegated  management,  of  a  sort  of  partnership, 
will  be  followed  by  complete  assumption  of  ownership  and  man- 
agement. Democracy  sooner  or  later  must  undertake  this  great 
adventure.  Of  its  dangers  enough  has  been  said  in  the  preceding 
pages;  nor  can  any  open-minded  person,  however  ardent  for  the 
betterment  of  mankind,  however  hopeful  of  ulti»mate  benefit, 
look  forward  to  its  course  with  a  light  heart.  The  difficulties  to 
be  faced  are  bound  up  with  all  the  problems  of  democratic  govern- 
ment, of  political  and  social  progress.  But  to  this  sort  of  task  we 
must  gird  our  loins. 


CHAPTER  65 
Combinations  and  Trusts 

Section  1.  Combinations  in  restraint  of  trade  and  the  common  law  rule  mak- 
ing them  void.  Surprising  effectiveness  of  this  rule,  441  —  Sec.  2.  Mod- 
ern forms  of  combination  in  the  United  States:  the  "trust,"  the  holding 
company,  the  unified  corporation.  The  Kartell  in  Germany.  The  fact  of 
monopoly,  not  the  form  of  combination,  the  important  thing,  443  —  See. 
3.  The  permanency  of  combination  as  affected  (1)  by  the  economies  of 
large-scale  management;  (2)  the  devices  of  "unfair"  competition  —  railway 
favors,  discriminations  in  prices,  factor's  agreements,  advertising  devices. 
The  effective  defense  against  "unfair"  competition  is  not  from  legislation 
so  much  as  from  large-scale  competition,  447  —  Sec.  4.  Will  large-scale 
competition  persist?  The  pressure  from  constant  accumulation  of  fresh 
capital.  Potential  competition,  and  the  possible  emergence  of  far-sighted 
management  tinctured  by  a  sense  of  public  responsibility,  452  —  Sec.  5. 
The  possible  public  advantages  of  combination  lie  in  the  mitigation  of  in- 
dustrial fluctuations.  The  supposed  ruinous  effect  of  competition  to  be 
judged  from  this  point  of  view,  4.55  —  Sec.  6.  The  legislative  problems. 
Federal  regulation  called  for  on  publicity,  capitalization,  eventually  per- 
haps on  profits  and  prices,  458  —  Sec.  7.  The  earmarks  of  monopoly:  size, 
profits,  discriminating  prices,  460  —  Sec.  8.  Legislation  in  the  United 
States.  The  act  of  1890  and  its  enforcement.  The  acts  of  1914.  The 
Federal  Trade  Commission,  461  —  Sec.  9.  Economic  problems  have 
outrun  political  capacity  for  dealing  with  them,  463. 

§  1.  Attempts  at  combination  and  monopoly  are  as  old  as  in- 
dustry. In  European  countries,  during  the  earlier  stages  of  their 
economic  development,  such  attempts  were  subject  to  prohibition 
and  penalty.  During  the  modern  period,  the  trend  has  been,  until 
very  recent  years,  to  let  them  take  care  of  themselves,  competition 
being  relied  on  to  keep  prices  at  a  fair  or  normal  level.  In  English- 
speaking  countries  it  was  long  supposed  sufficient  simply  to  prevent 
the  enforcement  of  agreements  for  combination.  Under  our  com- 
mon law,  contracts  in  restraint  of  trade  are  void.  They  are  not 
punishable;  but  they  cannot  be  enforced  in  the  courts.  Just  what 
constitutes  a  contract  in  restraint  of  trade,  such  as  the  courts  will 

441 


442         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [65- §  1 

hold  void,  has  been  the  occasion  of  nice  legal  discrimination.  Some 
agreements  which  restrict  competition  are  adjudged  to  be  "rea- 
sonable," and  the  parties  to  them  will  be  held  to  their  contracts. 
Others  are  adjudged  to  be  "unreasonable,"  and  will  not  be  en- 
forced. The  line  of  distinction  is  in  principle  clear  enough:  those 
agreements  are  bad  which  tend  to  bring  a  range  of  prices  higher 
than  that  ensuing  under  free  competition. 

It  is  astonishing  how  effective  this  simple  policy  of  indifference 
has  been.  Combinations,  pools,  and  price  agreements  among  man- 
ufacturers and  dealers  have  been  among  the  most  common  phe- 
nomena of  modern  industry.  Almost  invariably  (unless  bolstered 
up  by  some  independent  cause  conducive  to  monopoly  control) 
they  have  gone  to  pieces  of  themselves.  The  persons  forming  them 
have  been  both  shortsighted  and  covetous.  It  has  often  been  the 
case  that  all  would  have  made  larger  gains  if  all  had  stuck  to  their 
restrictive  agreements.  But  each  has  been  desirous  of  increas- 
ing his  own  particular  gains,  and  each  has  been  suspicious  of  his 
associates.  The  usual  result  has  been  that  price  combinations  are 
no  sooner  made  than  broken,  with  much  lament  that  there  is  so 
little  honor  among  these  gentry.  Even  where  the  would-be  mo- 
nopolists have  held  together  for  a  while,  competition  from  outside 
has  soon  caused  their  compact  to  crumble  away.  The  outside  com- 
petitors also  have  been  covetous  and  shortsighted,  failing  to  see  that 
their  own  entrance  into  the  field  tended  to  destroy  the  very  gains 
in  which  they  were  trying  to  share.  The  truth  is  that  few  men, 
in  business  or  in  other  doings,  look  beyond  the  present  and  imme- 
diate future.  Had  they  a  more  resolute  and  intelligent  eye  to 
ultimate  results,  the  policy  of  letting  people  try  at  monopoly,  but 
refusing  legal  sanction  to  their  monopolistic  agreements,  would 
have  proved  much  less  effective. 

In  our  own  day  the  situation  is  changing  fast,  at  least  in  manj^ 
directions.  Far-reaching  plans  and  ultimate  results  play  a  greater 
and  greater  part  in  industry.  Still  more  important  is  the  fact  that, 
as  large-scale  production  spreads,  the  number  of  individual  estab- 
lishments diminishes,  and  the  entrance  of  new  competitors  grows 
increasingly   difficult.    The   attempts   at   combination   become 


65-§2]  COMBINATIONS  AND  TRUSTS  443 

more  persistent  and  ingenious,  and  the  eflficacy  of  a  policy  of  non- 
interference becomes  more  uncertain. 

§  2.   First  among  the  modern  endeavors  in  the  United  States  to 
prevent  the  disintegration  of  non-enforceable  agreements  and  so 
secure  a  tight  combination,  was  the  trust  device,  which  gave  to 
the  term  "trust"  the  meaning  now  embodied  in  famihar  usage. 
Large-scale  operations  being  commonly  conducted  under  corporate 
organization,  it  was  arranged  that  the  holders  of  stock  in  the 
several  companies  to  be  combined  should  all  transfer  their  shares 
to  a  few  selected  persons  as  trustees;  these  trustees  then  holding  the 
shares,  and  having  the  rights  of  vote  and  control  which  belong  to 
titular  shareholders,  but  being  under  obligation  to  manage  the 
property  for  the  benefit  of  their  cestuis  (to  use  the  legal  phrase) 
and  to  turn  over  to  these  all  dividends  and  profits.    Thus  the 
scattered  owners  and  their  enterprises  would  be  tied  irrevocably 
to  the  combination,  and  the  trustees,  as  nominal  stockholders, 
would  control  everything  in  their  own  hands;  while  at  the  same 
time  the  summary  control  over  trustees  by  courts  of  equity  would 
prevent  over-reaching  of  the  owners  by  these  trustees.     It  was  an 
ingenious  device,  but,  as  it  proved,  one  to  which  the  courts  refused 
to  give  the  expected  legal  solidity.     In  a  test  case  it  was  held  that 
the  ordinary  machinery  of  the  law  would  not  be  used  to  carry  out 
a  scheme  in  effect  monopolistic;  and  it  was  held  further  that  a  cor- 
poration which  practically  divested  itself  in  such  fashion  of  its  in- 
dependence was  subject  to  dissolution.     This  particular  method 
of  securing  tight  combination  was  accordingly  given  up  in  the  in- 
dustries in  which  it  was  tried.     The  only  permanent  outcome  was 
that  the  word  "trust"  came  to  be  attached  in  popular  parlance  to 
any  and  every  sort  of  combination,  and,  indeed,  to  any  and  every 
bjrt  of  large-scale  operation. ^ 

The  holding  company  formed  the  next  stage,  and  indeed  is  still 
the  prevalent  stage  in  the  United  States.     A  corporation  is  formed 

1  The  "  trust "  device  was  first  used  by  the  Standard  Oil  combination.  The  Sugar 
Refiners  tried  it  later,  and  it  was  in  their  case  that  the  courts  refused  to  apply  the 
law  as  had  been  expected  by  the  astute  lawyers  who  had  framed  the  scheme.  These 
enterprises,  and  the  others  that  tried  it,  have  all  turned  to  other  forms  of  combi- 
nation. 


444  PKOBLEMS  OF  ECONOMIC  ORGANIZATION       [65- §  2 

which  acquires  the  stocks  of  the  several  combining  concerns  — 
either  all  of  the  shares,  or  enough  to  give  control.  Its  directors 
thus  become  the  effective  managers,  just  as  the  trustees  under  the 
trust  scheme  were  designed  to  be.  The  original  corporations  retain 
their  existence,  and  nominally  continue  to  do  business  as  before; 
but  all  control  is  united  in  one  board.  This  device,  nowadays  so 
familiar,  has  the  advantage,  for  the  would-be  monopolists,  of 
achieving  the  result  and  at  the  same  time  concealing  it.  It  may 
easily  be  made  to  appear  that  no  combination  at  all  has  been 
effected.  It  has  other  tactical  advantages,  too;  there  are  wheels 
within  wheels,  holding  corporations  for  the  original  holding 
corporation,  and  thus  not  only  further  concealment,  but  easy 
possibility  of  manipulation  by  a  small  knot  of  insiders.  These 
same  results  are  in  the  main  disadvantageous  from  the  public  point 
of  view;  they  bring  obsciu*ity,  mendacity,  stockjobbing,  danger  of 
corruption.  There  is  a  strong  disposition  to  put  a  check  on  the 
holding  company  device,  which  can  easily  be  done  by  prohibiting 
a  corporation  from  being  the  shareholder  of  another  corporation.^ 
The  last  stage,  and  the  one  to  which  the  others  lead,  is  simply 
that  of  the  great  or  giant  corporation,  into  which  all  the  former  com- 
peting enterprises  are  formally  and  completeh'  merged.  The  hold- 
ing corporation  tends  to  develop  into  this,  its  constituent  (or  sub- 
ordinate) parts  being  deprived  of  their  nominal  independence,  and 
the  shareholders  becoming  direct  shareholders  in  the  single  com- 
pany. For  some  time  the  indications  w^ere  that  the  attainment  of 
this  final  stage  of  combination  would  be  accelerated  by  the  very 
endeavors  of  our  law  to  suppress  combination.  Under  the  pro- 
hibitory statute  of  1890  (the  so-called  Sherman  Act),  a  holding 
company  might  be  unlawful,  and  subject  to  dissolution,  on  the 
simple  ground  that  it  obviously  stifled  competition  between  the 
subordinate  corporations  held  together  by  it.     WTiether  the  com- 

1  This  power  —  to  hold  the  stock  of  another  corporation  —  never  belongs  to  a 
corporation  under  Enjclish  and  American  law,  unless  given  in  express  terms  by  the 
grant  of  its  charter  from  the  sovereign  power.  In  the  absence  of  express  grant, 
such  holding  is  ultra  vires.  Our  American  states  have  been  so  complaisantly  liberal 
in  their  laws  as  to  incorporation,  and  have  so  frequently  given  the  power,  that  most 
people  are  unaware  of  its  being  dependent  on  specific  authorization,  and  do  not 
know  how  easy  it  is  —  given  only  the  will  —  to  check  this  form  of  combination. 


6o-§2]  COMBINATIONS  AND  TRUSTS  445 

pletely  unified  corporation,  made  up  de  novo  from  the  others  that 
completely  disappear  as  corporations,  stifles  competition,  and  hence 
becomes  subject  to  the  prohibitions  of  the  statute,  is  a  question 
much  less  easy  to  decide ;  since  it  involves  inquiry  about  the  rela- 
tions between  the  consolidated  company  and  its  "outside"  rivals. 
As  will  appear  in  the  course  of  this  chapter,  it  is  often  difficult  to 
make  out  whether  such  a  company  attains  a  monopoly,  even 
whether  it  strives  to  attain  one;  and  still  more  difficult  to  decide 
what  is  wise  policy  in  dealing  with  such  a  real  or  would-be  mo- 
nopoly. Yet  these  problems  will  have  to  be  faced  before  long 
both  by  the  judges  and  by  the  legislators;  for  the  holding  company 
is  likely  to  be  succeeded  by  the  form,  less  vulnerable  before  the  law 
as  it  now  stands,  of  complete  consolidation. 

In  Germany,  and  on  the  continent  of  Europe  in  general,  a  dif- 
ferent state  of  the  law  has  caused  combinations  to  take  a  different 
form.  There  contracts  in  restraint  of  trade  are  not  void;  they  are 
enforced  as  between  the  parties;  but  they  may  lead  to  penalization 
if  deemed  by  the  courts  reprehensible  or  inconsistent  with  the 
public  interest.  The  interpretation  of  these  general  principles 
has  been  the  subject  of  as  much  nicety  in  judicial  construction  as 
has  been  the  English  common-law  principle  with  regard  to  restraint 
of  trade.  Broadly  speaking,  however,  their  outcome  has  been 
plain.  Ordinary  agreements  for  pooling,  fixing  prices,  and  the  like, 
which  are  not  enforceable  in  the  countries  of  English  law,  are  en- 
forceable on  the  Continent. 1  The  parties  having  once  come  to  an 
agreement  must  abide  by  it.  Hence  they  are  not  prompted  to 
those  devices  for  tighter  combination  which  play  so  large  a  part 
in  our  American  development.  The  German  Kartell  is  commonly 
an  elaborate  organization,  public  and  formal,  which  fixes  prices 
and  prevents  the  members  from  competing  with  each  other.  In 
its  tjT>ical  form,  it  includes  a  central  sales  agency,  to  which  orders 
go  and  by  which  sales  and  prices  are  effected ;  and,  not  less  impor- 
tant, it  provides  for  a  limitation  and  apportionment  of  output,  each 

1  See  the  excellent  article  by  Dr.  F.  Walker,  "The  Law  Concerning  Monopolistic 
Combinations  in  Central  Europe,"  Political  Science  Quarterly,  Vol.  XX,  p.  13 
(March,  1905). 


446         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [65- §2 

member  being  assigned  a  specified  amount  (or  proportion  of  a  total) 
within  which  he  must  confine  his  product.  The  Kartell  leaves  to 
the  individual  members  a  greater  degree  of  independence  than  any 
of  the  American  forms  —  the  trust  or  the  holding  company  or  the 
unified  corporation ;  since  each  member  manages  his  establishment 
in  his  own  way.  It  is  disputable  whether  the  German  method  does 
or  does  not  lead  to  technical  improvements  more  than  does  the 
American  —  whether  the  spiu*  which  each  German  producer  still 
has  in  cheapened  production  outweighs  the  advantage  from  large- 
scale  consolidated  management  on  the  American  plan.  Nor  is  it 
clear  whether  the  German  Kartell  is  a  mere  transitional  stage,  likely 
to  be  followed  in  time  by  complete  consolidation.  There  is  no 
such  pressure  from  the  German  law  toward  forming  an  all-embrac- 
ing giant  monopoly ;  and  the  course  of  economic  development  has 
been  slower  and  more  tentative. 

The  form  which  combination  may  take  is  obviously  less  im- 
portant than  the  fact  of  combination.  The  essential  question  is 
whether  the  conditions  of  competition  are  in  effect  supplanted  by 
those  of  monopoly.  Combination  does  not  necessarily  mean  mo- 
nopoly; it  may  mean  only  a  regulation  or  modification  of  competi- 
tion. But  the  object  of  those  who  plan  it  is  to  stifle  comj)etition 
in  some  degree,  and  to  secure  greater  gains  than  competition  will 
permit.  In  the  United  States,  a  new  goal  of  business  ambition 
appeared  in  the  latter  part  of  the  nineteenth  century  (more  specifi- 
cally, in  the  decade  1880-1890) :  business  leaders  began  to  scheme 
for  full  monopoly,  not  only  in  the  industries  of  unified  plant,  but  in 
ordinary  manufacturing  industries.  The  Standard  Oil  enterprise 
was  the  first  conspicuous  instance;  the  Sugar  Refining  concern  was 
another.  Both  proved  financially  successful  to  a  marvelous  de- 
gree. Toward  the  close  of  the  century  a  veritable  rush  for  similar 
combination  took  place  over  a  great  range  of  industries.  At  the 
same  period  in  Germany  the  Kartell  of  the  coal  mines  proved  stable, 
increased  the  profits  of  the  mine  owners,  and  served  to  raise  in  even 
greater  degree  the  quotations  for  shares  in  their  companies.  Here, 
too,  a  conspicuously  successful  cage  led  to  a  rapid  spread  of  combi- 
nation.   The  trust  problem  suddenly  appeared  full-fledged. 


65-§3]  COMBINATIONS  AND  TRUSTS  447 

§  3.  Two  different  questions  present  themselves.  One  relates 
to  the  permanency  of  the  combination  or  trust:  whether  it  wull 
have  advantages  in  methods  of  production  which  will  enable  it  to 
hold  its  own  and  bring  financial  gain  to  its  promoters.  The  other 
is  concerned  with  its  effects  on  the  public:  whether  it  brings  ad- 
vantages for  the  organization  of  industry  toward  the  general  good. 
These  two  sorts  of  possible  advantage  we  may  consider  in  order. 

The  permanency  of  a  combination,  or  its  success  in  the  business 
man's  sense,  depends  partly  on  the  real  economies  which  it  makes 
possible,  partly  on  some  tactical  advantages  or  so-called  "unfair" 
advantages. 

The  real  economies  of  combinations  are  chiefly  those  of  large- 
scale  production,  and  have  been  already  considered. ^  They  vary 
from  industry  to  industry,  and,  within  a  given  industry,  vary  from 
time  to  time  vAth  the  progress  of  invention.  No  general  rule  can 
be  laid  down  regarding  them.  Only  the  test  of  competition  and 
experience  can  decide  whether  an  establishment  produces  more 
and  more  cheaply'  as  it  grows  larger  and  larger.  The  special  ques- 
tion presented  in  this  regard  by  the  trust  movement  seems  to  be 
whether  a  combination  of  establishments,  each  one  of  which  is  large 
enough  to  secure  the  utmost  mechanical  efficiency,  can  yet  be  so 
managed  as  to  produce  more  economically  than  the  several  estab- 
lishments when  independent;  in  other  words,  whether  large-scale 
management  adds  something  to  the  gains  from  large-scale  produc- 
tion in  the  narrower  sense.  Here,  too,  it  would  appear  at  first  sight 
that  the  matter  may  be  allowed  to  settle  itself.  Let  them  fight  it 
out,  and  let  that  form  of  organization  survive  which  does  the  work 
most  cheaply. 

The  question  arises,  however,  whether  the  "unfair"  advantages 
of  a  great  combination  may  not  enable  it  to  overcome  rivals,  even 
tho  these  can  produce  as  cheaply  and  serve  the  public  as  well.  May 
not  the  great  producer  secure  tactical  advantage  from  mere  size, 
mere  length  of  purse,  mere  pressure  thru  influence  and  threat  and 
manipulation,  which  will  enable  him  to  destroy  his  smaller  yet 
equally  serviceable  rival? 

i  See  Chapter  4,  §  4. 


448         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [65- §3 

One  tactical  advantage,  much  referred  to  in  the  debates  on  this 
topic,  has  arisen  from  preferential  rates,  in  the  way  of  rebates  and 
the  like,  on  our  American  railways.  The  notorious  special  rates 
secured  by  the  Standard  Oil  Company  were  of  great  aid  in  enabling 
that  combination  to  crush  or  absorb  its  rivals,  especially  in  its 
earlier  stages.  Other  great  combinations  enjoyed  similar  favors, 
and,  like  the  Standard  concern,  threatened  to  become  masters  of 
the  railways.  Tho  one  great  cause  which  led  to  this  evil  in  former 
days  —  the  peculiar  pressure  to  which  a  railway  is  subjected  when 
competing  with  rivals  —  has  been  weakened  by  growing  consoli- 
dation among  the  railways  themselves,  another  source  of  similai 
danger  has  come  from  the  widespread  dominance  of  the  persons  who 
engineer  the  trusts.  The  concentration  in  the  control  of  great 
industrial,  banking,  and  transportation  enterprises  has  threatened 
an  interrelation  of  "  interests ' '  and  a  moneyed  oligarchy  over  great 
stretches  of  the  industrial  field. 

None  the  less,  the  influence  of  this  factor  in  promoting  and  main- 
taining trusts  has  probably  been  exaggerated.  Special  rates  were 
part  of  the  general  chaos  of  railway  rates  in  the  earlier  period. 
They  resulted  from  large-scale  operations,  and  in  turn  promoted 
large-scale  operations;  and  it  was  this  general  development,  inher- 
ent in  modern  conditions,  which  led  to  the  general  movement  for 
industrial  combination.  The  evil  of  railw^ay  preferences  has  been 
immensely  diminished,  almost  w^iped  out,  by  the  penalties  imposed 
in  the  interstate  commerce  act  of  1887  and  the  later  measures  of  the 
same  sort,  by  the  consolidation  of  the  railway  net,  and  by  the  grow- 
ing sense  of  public  responsibility  in  railway  management.  Yet  the 
industria'  combinations  have  remained,  even  tho,  like  the  railways 
themselves,  they  have  turned  to  less  intriguing  and  irregular 
methods  of  operation.  And  it  would  seem  certain  that,  notwith- 
standing the  slow  and  halting  progress  of  public  regulation,  and 
notwithstanding  the  many  ways  of  concealing  an  advantage 
under  outward  forms  of  equal  railway  rates,  this  cause  of  ad- 
vantage for  the  browbeating  combination  will  cease  to  be  of 
importance  in  the  future. 

Other  devices  of  combinations  for  getting  competitors  out  of  the 


65-§3]  COMBINATIONS  AND  TRUSTS  449 

way  are  more  direct.  Simplest  of  all  is  cutthroat  competition  — 
sales  at  prices  ruinously  low,  designed  to  force  the  rival  into  bank- 
ruptcy or  absorption.  Mere  length  of  purse,  without  possession  of 
any  real  advantage  in  efficiency,  may  bring  victory  in  this  sort  of 
warfare.  A  similar  method  of  crushing  a  competitor,  more  insidi- 
ous and  effective,  is  thru  a  partial  reduction  of  prices,  designed  to 
oust  him  from  his  particular  field.  Thus  a  combination  which 
manufactures  a  variety  of  articles  may  cut  the  price  of  a  single  one, 
in  order  to  bankrupt  a  rival  who  produces  that  one ;  the  combina- 
tion maintaining  prices  on  its  other  articles,  and  thus  offsetting  in 
part  or  entirely  its  loss  on  the  contested  one.  This  result  is  also 
secured  if  the  combination  can  discriminate  in  prices  on  one  and 
the  same  article,  lowering  the  price  where  there  is  competition 
but  maintaining  it  elsewhere. 

All  su  h  maneuvers  were  again  and  again  illustrated  in  the  his- 
tory of  the  Standard  Oil  Company,  the  archetype  of  the  industrial 
trust.  In  its  sales  of  illuminating  oil  —  which  was  the  main 
product  —  its  method,  carried  out  with  remarkable  skill,  was  to  sell 
to  retail  dealers  only.  In  the  phrase  of  the  mercantile  community, 
it  did  its  own  jobbing  In  the  regions  where  there  was  competition 
from  other  refiners,  it  cut  prices  ruthlessly.  But  it  kept  prices 
up  in  other  regions  where  there  was  no  competition,  and  so  main- 
tained its  own  profits.  This  policy  would  have  been  difficult  to 
carry  out  had  it  sold  to  jobbing  wholesalers,  since  these  not  only 
compete  with  each  other  over  widely  extended  markets,  but  know 
of  each  other's  doings  and  buy  and  sell  among  themselves.  Each 
retailer,  on  the  other  hand,  covers  a  limited  region  only;  he  does 
not  compete  with  distant  retailers,  or  concern  himself  about  the 
prices  at  which  they  buy  and  sell.  Obviously',  some  geographical 
limitation  on  its  competitors  was  also  essential  to  the  successful 
working  of  this  device;  the  competitors  must  have  been  kept  from 
reaching  the  retail  market  at  all  points,  either  by  transportation 
rates  higher  than  those  granted  to  the  Standard,  or  by  the  isolated 
location  of  their  refineries. 

Still  another  device  is  the  factor's  agreement,  so  called  —  a  con- 
tract with  a  dealer  (wholesale  or  retail),  by  which  he  agrees  to  sell 


450         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [65-§3 

only  goods  produced  by  the  combination.  If  the  combination  has 
a  "line"  of  goods  which  are  estabhshed  in  public  favor,  the  dealer 
feels  that  he  must  have  them.  If  many  dealers  are  coerced  or 
cajoled  into  buying  these,  and  these  only,  a  rival  producer  on  a 
smaller  scale  finds  great  difficulty  in  marketing  his  more  limited  set 
of  goods. 

A  possible  influence  of  the  same  sort  appears  in  advertising. 
Mere  effrontery  in  puffing  your  wares  is  an  important  factor  in 
modern  trade.  The  advertising  problem  is  a  curious  one.  It  is 
not  easy  to  say  just  how  far  advertising  serves  a  good  purpose,  how 
far  it  means  waste.  No  doubt,  it  introduces  new  contrivances, 
promotes  variety  in  production  and  consumption;  and  it  is  often  a 
means  of  useful  competition.  But  sometimes  it  is  a  weapon  of  de- 
structive competition.  Among  articles  equally  good,  that  which 
is  systematically  paraded  is  likely  to  be  most  readily  sold.  People 
are  led  to  buy  Smith's  wares  rather  than  Jones's.  One  might  sup- 
pose that  if  Smith's  wares  were  equally  good,  and  were  sold  at  a 
lower  price  (made  possible  by  eliminating  the  advertising  expense), 
he  would  hold  his  own  in  spite  of  Jones's  preposterous  puffing. 
But,  in  fact,  Jones's  wares  are  preferred;  some  vague  impression 
of  superiority  is  produced  by  the  incessant  boasting.  Plentiful 
cash  is  the  sifie  qua  non  of  an  effective  advertising  campaign.  The 
large  producer,  or  would-be  monopolist,  has  here  again  a  tactical 
advantage. 

The  same  is  true  of  other  means  for  popularizing  your  goods  — 
prizes,  premiums,  gifts,  pictures,  what  not.  These  delude  the  pur- 
chaser into  the  belief  that  he  is  getting  something  for  nothing. 
Like  mendacious  advertising,  they  rest  on  the  gullibility  of  man- 
kind, and  are  effective  in  proportion  as  they  are  carried  out  on  a 
large  scale.  The  Tobacco  combination  in  the  United  States  has 
practised  the  arts  of  advertising  and  of  premium-giving  syste- 
matically and  successfully ;  success  being  promoted  by  the  fact  that 
for  its  commodity  goodwill  and  the  brand  are  of  special  importance. 

It  has  been  proposed  to  deal  with  some  of  these  tactical  devices 
by  legislation.  Intentional  cutthroat  competition  —  the  lowering 
of  prices  for  the  express  purpose  of  driving  out  a  rival  —  is  to  be 


65-§3]  COMBINATIONS  AND  TRUSTS  451 

made  unlawful.  It  is  to  be  made  cause  either  for  a  civil  action  for 
damages  by  the  threatened  competitor,  or  for  criminal  prosecution, 
or  both.  Discrimination  in  prices  is  also  to  be  made  unlawful.  A 
producer  is  to  be  compelled,  under  penalty  of  civil  or  criminal  law, 
to  sell  at  the  same  prices  to  all  applicants  and  in  all  markets.  He 
is  to  be  dealt  with  as  the  law  now  deals  with  common  carriers,  who 
are  under  obligations  to  do  business  for  everybody  on  the  same 
terms.  Neither  cutthroat  competition  nor  discriminating  prices 
are  now  under  the  ban  of  the  law  in  English-speaking  countries. 
They  are  not  punishable,  or  cause  for  civil  suit,  under  the  common 
law  nor  usually  under  statutes.  Underlying  this  state  of  the  law  is 
the  belief  in  the  efficacy  and  usefulness  of  unfettered  competition. 
The  public  good  is  supposed  to  be  promoted  by  allowing  every 
competitor  to  press  every  other  as  bitterly  as  he  chooses.  The  ques- 
tion fairly  arises  whether  we  must  not  admit  that  here,  as  in  other 
directions,  competition,  on  the  plane  and  wuthin  the  bounds  hith- 
erto traditional,  fails  to  work  for  the  general  good. 

The  case  is  plausible  for  such  changes  in  the  law.  Unless  one 
is  a  convinced  socialist,  and  believes  that  monopoly  is  simply  a 
welcome  forward  step  toward  the  eventual  assumption  of  all  indus- 
trial management  by  the  state,  every  measure  that  aids  in  main- 
taining "fair"  or  normal  competition  is  good.  It  may  be  that  the 
situation  is  hopeless,  and  that  over  a  wide  and  widening  range  of 
industries  nothing  can  stay  the  march  of  combination  and  mo- 
nopoly. At  least  let  all  be  done  that  can  be  done  toward  checking 
the  ominous  tendency. 

Not  too  much,  however,  should  be  expected  from  legislation  of 
this  kind.  There  are  those  who  believe  that,  unless  there  be  other 
causes  leading  to  monopoly,  changes  in  the  law  on  competition  will 
suffice  to  prevent  that  control  of  industry  and  that  eventual  rise 
of  prices  at  which  exterminating  competition  aims.  But  unless 
"fair"  competition  is  strengthened  by  economic  forces  —  by  in- 
dustrial conditions  enabling  the  independent  producer  to  hold  his 
own  —  little  is  likely  to  be  gained  by  this  method  of  staving  off 
the  growth  of  monopoly. 

Such  legislation  is,  in  its  nature,  difficult  to  enforce.    What  is 


452         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [65-§4 

cutthroat  competition?  Mere  lowering  of  prices  is  the  ordinary 
salutary  result  of  competition.  Intention  to  wipe  out  a  competi- 
tor, the  only  thing  which  the  law  can  make  cause  for  action,  is  dif- 
ficult to  prove.  Cost  of  production,  fair  price,  deviations  in  market 
prices  —  these  cannot  be  settled  with  the  precision  essential  in 
legal  procedure.  They  are  necessarily  notions  of  some  vagueness. 
A  prohibition  of  a  factor's  agreement,  again,  is  easily  evaded.  All 
that  needs  be  done  is  to  abstain  quietly  from  dealing  with  the 
trader  who  on  his  part  persists  in  dealing  with  the  would-be 
monopolists'  competitors.  A  suit  at  law  based  on  a  remodeled 
law  of  "fair"  competition  would  be  a  very  uncertain  defense 
against  monopolistic  aggression. 

The  effective  defense  is  found  only  when  Greek  meets  Greek  — 
when  the  big  monopoly  meets  with  a  big  competitor.  All  the  de- 
vices of  "unfair"  competition  are  devices  of  the  large  producer 
and  the  long  pm'se.  One  whose  purse  is  equally  long  will  endure 
cutthroat  competition  equally  well;  will  meet  discrimination  with 
discrimination,  will  make  his  own  factors'  agreements.  Large 
producers  will  be  able  to  compete,  even  tho  the  law  of  competition 
remains  unchanged.  The  real  question  is  whether  competition 
among  large  producers  will  be  permanently  maintained. 

§  4.  With  regard  to  the  permanency  of  competition  between 
large-scale  producers,  two  conflicting  forces  or  tendencies  meet; 
and  it  is  not  easily  foreseen  which  will  prevail.  On  the  one  hand,  the 
competitors  are  likely  to  cease  fighting  and  to  combine.  Where  the 
growth  of  large-scale  operations  reduces  the  number  of  individual 
establishments  to  a  dozen  or  so,  they  are  almost  sure  to  get  together 
sooner  or  later.  On  the  other  hand,  the  rapid  increase  of  savings 
and  of  surplus  for  investment  causes  an  incessant  search  for  profit- 
able openings.  At  the  same  time  the  supply  of  managing  ability  is 
constantly  enlarged  and  varied  with  the  rise  of  fresh  generations 
of  capable  business  men.  New  capital  and  new  ability  will  be 
turned  to  every  industry  that  offers  large  profits;  and  so  long  as 
this  is  the  case,  monopoly  gains  will  not  be  all-pervading,  but  con- 
fined to  a  comparatively  limited  range. 

There  can  be  no  question  of  the  possibility,  nay  the  probability, 


65-§4]  COMBINATIONS  AND  TRUSTS  453 

of  some  sort  of  agreement  among  the  large-scale  producers.  These 
things  go  very  much  by  tradition  and  habit;  and  the  former  indi- 
vidualistic traditions  are  broken  among  the  capitalists  themselves 
as  well  as  among  the  social  philosophers.  The  notion  of  getting 
together  and  ceasing  from  competition  is  becoming  a  familiar 
one,  and  is  thrusting  aside  the  older  feeling  of  pride  in  indepen- 
dent management.  It  is  extraordinary  how  far  the  experiments 
in  combination  have  been  carried;  not  only  to  those  industries 
where  but  a  few  large  establishments  —  a  dozen  or  so  —  are  left 
in  the  field,  but  to  those  where  the  number  is  thirty,  fifty,  even  a 
hundred.  It  is  true  that  the  larger  the  number,  the  more  dif- 
ficult it  is  to  form  an  effective  trust,  and  the  more  probable  it  is 
that  competitors  will  remain  or  will  reappear.  It  would  be  difficult 
to  say  within  what  limits  the  movement  is  confined  by  the  techni- 
cal conditions  themselves. 

One  special  obstacle  in  the  way  of  getting  capital  to  embark  on  a 
large  scale  in  competition  with  the  great  combinations  has  arisen 
from  the  consolidation  of  banking  operations  and  the  concatenation 
of  these  with  the  trusts.  New  investments  on  a  large  scale  are 
hardly  possible  without  being  "financed."  The  financial  leaders 
are  often  in  a  tacit  understanding  not  to  get  in  each  other's  waj'. 
In  the  Germany  of  pre-war  days,  where  the  consolidation  of  bank- 
ing had  proceeded  farther  than  in  the  other  countries,  each  one  of 
the  great  banking  institutions  had  under  its  wing  a  set  of  industrial 
ventures.  A  newcomer  finds  it  difficult  to  get  the  opening  wedge 
of  a  banker's  backing.  Something  of  the  same  sort  is  true  in  the 
United  States  also.  It  is  not  probable,  however,  that  this  obstacle 
to  newly  competing  enterprises  will  be  permanent.  The  constantly 
accumulating  savings  must  find  an  outlet  somewhere,  and  no  com- 
bination can  prevent  new  banking  firms  from  arising,  with  new 
financial  and  industrial  leaders,  who  will  try  to  break  into  the 
jealously  guarded  preserves. 

Among  the  forces  which  are  likely  to  give  a  new  start  to  compe- 
tition, we  must  reckon  not  only  the  unceasing  accumulation  of 
capital  and  the  ambition  of  new  business  men,  but  the  possibility 
of  decay  in  the  management  of  the  combination  itself.     A  success- 


454         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [65-§4 

ful  combination  is  commonly  brought  about  by  uniting  in  one  or- 
ganization the  largest  and  best-managed  enterprises  in  a  given  in- 
dustry; the  lesser  establishments  being  bought  up  or  "frozen  out." 
Initial  success  is  due  to  the  ability  and  prestige  of  the  leaders.  As 
time  goes  on,  new  leaders  must  be  found.  But  nepotism  is  likely 
to  appear  in  the  established  management.  Competition,  which  had 
brought  the  original  managers  to  the  fore,  no  longer  acts  to  bring 
about  in  the  combination  itself  the  sm-vival  of  the  fittest.  True, 
goodwill  and  prestige  go  a  long  way,  and  it  is  easier  to  hold  a  posi- 
tion of  command  than  to  attain  it.  But  the  economies  of  large-scale 
management,  as  well  as  the  tricks  of  "unfair"  competition,  can  be 
learned  by  others;  the  stimulus  of  ambition  is  most  powerful  among 
those  who  have  their  fortunes  to  make;  and  any  settled  enterprise 
—  be  it  a  trust,  a  bank,  a  newspaper  —  is  in  danger  of  dry-rot. 

Whether  or  no,  as  the  outcome  of  these  contending  forces,  com- 
binations and  trusts  will  prove  to  hold  their  own  permanently,  it 
seems  certain  that  in  the  ordinary  manufacturing  industries,  even 
in  those  where  large-scale  operations  prevail,  nothing  but  a  pre- 
carious and  limited  monopoly  can  result.  The  trust  must  be  al- 
ways on  its  mettle,  always  on  the  watch  against  interlopers.  These 
may  be  browbeaten  or  bought  up;  nevertheless  new  ones  will  con- 
stantly appear  if  the  profits  are  very  high.  The  trust  may  become 
a  dominant  form  of  organization,  and,  by  good  management,  may 
maintain  itself  permanently  without  bringing  about  true  monopoly 
prices  or  extraordinary  profits. 

There  is  therefore  the  possibility  —  perhaps  the  most  hopeful 
for  the  immediate  future  —  of  a  tempered  sort  of  combination 
under  far-seeing  management  and  with  some  sense  of  responsibility 
to  the  public.  The  guiding  spirits  may  wisely  conclude  that  com- 
petitors must  be  faced,  and  that  it  is  good  policy  to  keep  profits 
within  limits  that  will  not  tempt  newcomers.  Such  is  the  outcome 
expected  from  "potential  competition":  unified  control,  a  stable 
course  of  industry,  but  prices  and  profits  not  greatly  different  from 
what  would  result  under  competition.  Very  likely  the  profits  of 
the  commanding  corporation  would  be  liberal,  but  dependent,  after 
all,  chiefly  on  sustained  good  management. 


65-§5]  COMBINATIONS  AND  TRUSTS  455 

Such  a  turn  for  the  better  in  the  combination  movement  may  be 
promoted  by  pubhc  regulation  —  of  this  more  presently.  Much 
will  depend,  also,  on  the  state  of  mind  of  the  business  men  and 
the  well-to-do  property-owners.  Tho  these  still  worship  the  money- 
maker, the  pervasive  movement  for  promoting  the  common  interest 
which  has  so  profoundly  affected  social  legislation  and  economic 
thought  is  beginning  to  make  its  impression  on  their  ambitions 
and  ideals  also.  More  is  heard  of  fair  profits  and  fair  prices, 
legitimate  methods,  honest  gains,  a  "reasonable"  regard  for  the 
public  —  phrases  used  in  a  vague  and  question-begging  way,  but 
none  the  less  significant  of  a  tempered  attitude.  The  monopolist 
is  not  a  popular  person.  Even  tho  he  shelter  himself  in  the 
compan}^  of  those  to  whom  money  is  the  sole  test  of  distinction, 
he  feels  the  sting  of  general  reprobation.  This  change  in  public 
feeling  works  in  favor  of  that  sort  of  management  which  is  both 
moderate  and  farsighted,  is  perhaps  a  matter  of  shrewd  ex- 
pediency as  well  as  of  higher  spirit,  at  all  events  promotes  the 
general  interest. 

§  5.  What  now  are  the  possible  advantages  of  combinations  for 
the  community  —  of  combinations,  that  is,  so  large  and  so  nearly 
all-embracing  as  to  portend  monopoly? 

The  only  one  seriously  worth  considering  is  the  avoidance  or 
mitigation  of  fluctuations  in  industry.  The  irregularities  of  pro- 
duction and  employment  are  among  the  black  sides  of  the  existing 
re'gime.  The  removal  of  chaotic  competition  can  perhaps  do  some- 
thing to  check  them.  It  is  argued  that,  as  a  great  ship  can  hold 
its  course  regardless  of  wind  and  wave,  so  a  great  combination  can 
disregard  financial  disturbances  and  carrj^  on  its  operations  con- 
tinuously. 

The  possibility  exists;  but  much  depends  on  the  trend  of  devel- 
opment in  the  combination  movement.  It  is  quite  conceivable 
that  it  may  intensify  rather  than  mitigate  fluctuations.  A  gam- 
bling promoter  and  a  patched-up  combination;  an  attempt  to  raise 
prices  and  profits;  plenty  of  watered  stock,  with  speculation  and 
manipulation;  the  rise  of  competitors;  a  sudden  puncturing  of  the 
inflated  enterprise  and  a  collapse  on  the  stock  market,  followed 


456  PROBLEMS  OF  ECONOMIC  ORGANIZATION       [65-§5 

by  a  period  of  uncertainty  and  reorganization  —  these  are  familiar 
episodes  of  recent  times.  They  do  not  make  for  economic  steadi- 
ness. Perhaps  they  are  but  transitory,  and  will  cease  as  the  limits 
of  combinations  are  better  gaged  by  the  investing  and  business 
public.  There  may  be  a  development  of  farsighted  management 
and  stable  combination,  and  therewith  the  lessening  both  of  specu- 
lative and  of  industrial  irregularity.  The  United  States  Steel 
Corporation  has  attempted  to  moderate  the  fluctuations  in  an 
industry  which  has  been  peculiarly  subject  to  them,  and,  it  must 
be  admitted,  with  some  promising  results.  It  is  true  also  that 
among  the  railways  the  process  of  consolidation  has  checked  the 
former  alternations  from  feverish  new  construction  to  complete 
standstill.  Real  gains  for  the  community  would  come  if  industrial 
growth  could  be  made  to  take  place  more  systematically  and  con- 
tinuously. 

Another  supposed  gain  from  combinations,  in  some  ways  allied 
to  that  just  considered,  is  in  the  elimination  of  the  supposed  ruinous 
effects  of  competition.  Under  modern  conditions,  it  is  said,  com- 
petition is  maintained  to  the  last  ditch.  "VMien  a  great  plant  is 
once  started,  it  will  be  kept  going  so  long  as  anything  at  all  over 
operating  expenses  is  earned.  Railway  competition  best  illus- 
trates this  sort  of  extremity  (tho  accentuated  by  the  peculiar  con- 
ditions of  railway  transportation).  Any  industry  having  large 
fixed  capital  is  in  a  similar  case.  From  all  of  which  it  is  concluded 
that  unchecked  competition  will  inevitably  be  carried  to  the  point 
of  general  disaster  and  that  combination  is  the  sole  means  of  sal- 
vation. 

The  argument  has  some  foundation;  but  it  cannot  be  carried  far. 
No  doubt,  there  is  an  analogy  between  the  capitalist  producer  who 
has  a  going  concern  with  large  plant,  and  the  unorganized  laborer. 
Both  have  to  face  a  tendency  to  competitive  undercutting  of  stand- 
ard prices.  Neither  can  wait  without  loss.  Just  as  the  laborer's 
working  power  goes  to  waste  if  not  used,  so  the  capitalist's  plant 
and  overhead  organization  bring  a  definitive  loss  when  they  are 
idle.  Hence,  a  wholesaler  or  "jobber"  can  play  off  one  producer 
against  another,  and  nibble  away  at  "  f air  "  prices.    Hence,  too,  the 


65-§5]  COMBINATIONS  AND  TRUSTS  457 

disintegrating  influence  of  competition  on  the  minor  conditions 
of  the  bargains.  There  is  disguised  price  cutting  by  manipulation 
of  discounts,  by  allowances  for  packing  and  freight  charges,  by  easy 
interpretation  of  what  are  damaged  goods.  Similar  disguised  cut- 
ting of  the  standard  rate  takes  place  when  laborers  are  overcharged 
for  tools  and  materials  (in  the  case  of  miners,  for  example),  or  are 
called  on  to  work  overtime  without  extra  pay,  or  to  submit  to  ma- 
nipulation of  piecework  rates.  The  analogy  must  not  be  pressed  too 
far.  The  capitalists  are  not  so  likely  to  suffer  seriously  as  the  labor- 
ers, nor  is  their  bargaining  so  much  weakened  by  the  lack  of  stand- 
ardized definitions.  Yet  some  analogy  there  is.  In  both  cases 
there  is  a  chance  for  the  purchaser  to  play  off  one  seller  against  the 
other,  and  in  both  there  are  causes  which  justify  permanent  organ- 
ization for  combined  action. 

This  is  far  from  saying  that  a  tight  and  exclusive  combination  is 
necessary  to  protect  the  sellers,  whether  capitalists  or  laborers.  An 
organization  for  standardizing  competition  is  a  very  different  thing 
from  one  for  eliminating  competition.  Yet  many  persons  of  the 
business  class  talk  nowadays  as  if  competition  were  necessarily 
ruinous  to  producers,  and  as  if  there  were  no  escape  from  disaster 
except  thru  the  trust  or  Kartell.  Competition  does  not  go  on  auto- 
matically, or  irrespective  of  the  ultimate  outcome.  The  troubles 
of  capitalists  from  "excessive"  competition  will  bring  in  time  their 
own  cure.  People  will  not  continue  indefinitely  to  invest  in  in- 
dustries whose  profits  are  wiped  out  by  cutthroat  underbidding. 
The  real  source  of  difficulty  for  the  capitalists,  not  clearly  perceived 
by  those  who  say  that  modern  competition  of  necessity  works  dis- 
aster, is  the  constant  pressure  of  new  accumulations  for  investment, 
and  the  constant  tendency  to  a  decline  of  profits  in  known  and  es- 
tablished industries.  From  this  pressure  the  business  and  invest- 
ing public  is  always  trying  to  escape,  partly  by  the  wholesome  pro- 
cess of  improvement,  invention,  and  the  opening  of  new  fields, 
partly  by  the  noxious  one  of  combination  and  monopoly.^ 

The  real  evils  to  the  body  politic  from  "ruinous"  competition, 

1  Compare  with  what  was  said  on  this  topic  in  Chapter  41,  on  Overproduction 
and  Overinvestment. 


458         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [65-§6 

and  the  real  gains  which  combinations  may  bring,  are  of  the  sort 
mentioned  a  moment  ago:  they  bear  on  the  steadiness  of  industry. 
Competition  does  tend  to  alternations  between  feverish  activ- 
ity and  dull  depression.  Combination  may  conceivably  mitigate 
fluctuations.  If  it  does  so,  without  bringing  a  tyrannous  mo- 
nopoly —  if  the  peace  and  order  be  not  those  of  despotism  —  a  gain 
of  no  mean  social  import  will  have  been  achieved.  To  repeat,  it  is 
by  no  means  certain  that  this  desirable  outcome  will  be  reached; 
and  in  any  case  it  is  a  very  different  one  in  its  public  aspects  from 
that  preservation  of  profits  thru  the  elimination  of  competition 
which  the  business  and  investing  classes  are  disposed  to  welcome. 

§  6.  In  this  state  of  uncertainty  concerning  some  essential 
elements  in  the  problem  —  such  as  the  gain  in  efficiency  from 
large-scale  management,  the  potency  of  unfair  competition,  the 
mitigation  of  cyclical  fluctuations  —  there  is  inevitably  a  lack  of 
agreement  concerning  appropriate  legislation.  The  underlying 
question  of  all  is  disputed:  shall  there  be  acceptance  and  regula- 
tion (or  at  least  expectation  of  regulation),  as  in  Germany,  or  stern 
repression,  as  in  the  United  States?  Even  if  the  latter  policy  be 
considered  settled,  troublesome  questions  arise  concerning  the 
method  of  applying  it,  and  the  incidental  practices  which  may  be 
permitted  or  regulated.  For  the  time  being,  something  like  a 
Fabian  policy  is  alone  practicable. 

None  the  less,  in  developing  a  legislative  policy  such  as  the 
United  States  is  committed  to,  resting  on  the  suppression  of  mo- 
nopoly and  the  enforced  maintenance  of  competition,  some  things 
are  tolerably  clear.  Legislation  may  begin  on  certain  lines,  the 
results  of  experience  being  awaited  before  proceeding  further. 

The  most  obvious  thing  to  be  secured  is  greater  publicity,  thru 
regular  reports,  with  supervision  of  books  and  records  by  public  ac- 
countants. Tho  publicity  is  in  great  part  a  matter  between  in- 
vestors on  the  one  hand  and  promoters  and  managers  on  the  other, 
and  so  far  not  of  the  first  concern  to  the  general  public,  it  is  none 
the  less  of  much  importance  to  the  public ;  for  there  is  need  of  infor- 
mation on  which  to  base  legislation.  We  know  too  little  about  the 
extent  to  which  combination  has  brought  monopoly  conditions, 


65-§6]  COMBINATIONS  AND  TRUSTS  459 

and  know  even  less  about  the  likelihood  of  its  bringing  them 
in  the  future. 

Publicity  will  promote  that  better  sort  of  management  which  has 
just  been  referred  to  —  management  more  honest  toward  invest- 
ors more  farsighted  in  competition,  more  moderate  as  regards 
prices  and  profits.  How  far  a  turn  for  the  better  will  come  in  these 
matters,  how  far  private  industry  will  become  tinctured  with  some 
sense  of  public  responsibility,  remains  to  be  seen.  Effective  pub- 
licity will  aid  in  turning  the  course  of  development  in  this  better 
direction. 

Another  object  of  control  should  be  capitalization.  Here,  too, 
the  interest  of  the  public  is  an  indirect  one;  capitalization  is  pri- 
marily a  matter  between  investors  and  promoters.  So  far  as  the 
public  is  concerned  overcapitalization  is  not  a  source  of  monopoly 
profits,  but  only  a  device  for  concealing  them.  Its  regulation  rests, 
therefore,  on  essentially  the  same  grounds  as  the  general  require- 
ment of  publicity.  It  can  perhaps  be  supervised  with  effect  only 
by  incorporation  under  federal  law.  So  long  as  the  matter  is  left 
to  fifty-odd  legislatures,  there  will  inevitably"  be  some  complaisant 
or  indifferent  states  which  will  virtually  nullify  a  watchful  and  re- 
strictive procedure  adopted  by  the  majority.  Federal  incorpo- 
ration will  seem  to  many  persons  a  drastic  step.  However  unwel- 
come centralized  control  of  this  kind  may  be,  it  must  be  admitted 
among  the  possibilities  of  the  future. 

One  immediate  and  important  phase  of  the  control  of  combina- 
tions is  the  "holding  company."  It  may  be  going  too  far  to  pro- 
hibit at  once  any  corporation  from  holding  the  shares  of  another. 
At  the  least,  full  information  should  be  had  as  to  these  interrelated 
companies.  The  wheels  within  wheels  are  often  merely  devices 
for  concealing  the  real  situation,  or  for  easy  rotation  of  control  by 
a  few  insiders.  Genuine  publicity  will  be  secured,  and  effective 
regulation  made  possible,  only  if  the  whole  story  is  put  on  public 
record. 

The  various  forms  of  "unfair"  competition  call  for  attention: 
perhaps  mere  definition,  perhaps  regulation,  perhaps  stern  inhi- 
bition.   This  is  a  thorny  matter,  as  has  already  been  indicated. 


460         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [65-§7 

The  common  law  on  unfair  competition  may  need  to  be  revised; 
yet  this  part  of  the  legal  situation  seems  to  be  itself  in  a  state  of 
flux  and  uncertainty.  It  is  not  clear  that  amendatory  legislation 
is  called  for,  still  less  clear  what  shape  the  new  enactment,  if  needed, 
should  take. 

Control  of  profits  and  prices  is  a  more  drastic  step,  and  one  not 
often  formally  proposed.  It  is  obvious  enough  that  this  is  the 
thing  ultimately  aimed  at.  As  in  the  case  of  the  public  service 
industries,  the  essential  thing  is  the  effect  on  the  distribution  of 
wealth.  Publicity,  supervision  of  capitalization,  regulation  of 
competition,  all  look  to  this  main  end.  Perhaps  comparatively 
mild  measures  will  suffice  to  prevent  "undue"  profits  and  "un- 
reasonable" prices.  But  if  the  mere  suppression  of  overt  com- 
binations fail  to  achieve  the  desired  end,  control  of  profits  and 
prices  must  be  resorted  to.  It  may  be  direct  regulation  of  rates, 
like  that  of  the  Interstate  Commerce  Commission  on  railroads. 
It  may  take  the  form  of  regulation  of  profits  thru  taxation  of  exces- 
sive gains.  In  either  form  it  will  be  difficult  enough,  necessarily 
entailing  a  stringent  supervision  of  accounts.  The  open-eyed 
observer  of  industrial  changes  must  face  it  as  a  possible  measure. 

§  7,  One  troublesome  problem  will  present  itself  at  the  very 
beginning  of  any  attempt  at  systematic  legislation:  how  define 
the  thing  to  be  regulated?  What,  in  the  eye  of  the  law,  shall  con- 
stitute a  combination  or  monopoly  or  trust?  The  law  cannot  use 
rough  and  approximate  conclusions  or  statements,  such  as  often 
suffice  for  the  economist.  It  must  define  in  precise  terms.  What 
are  the  earmarks  of  a  monopolistic  combination? 

Mere  size  is  not  conclusive.  A  concern  may  be  of  huge  extent, 
as  to  capital  and  output,  and  yet  may  not  control  the  output  in 
such  manner  as  to  bring  to  itself  monopoly  returns.  Nor  is  pos- 
session of  the  field  a  conclusive  indication.  In  current  discussions 
it  is  sometimes  assumed  that  when  a  "trust"  produces  50  or  60  or 
70  per  cent  of  the  output  in  a  given  industry,  it  is  virtually  in 
absolute  control.  This  by  no  means  follows.  The  trust  maj'- have 
vigorous  competitors,  or  ma}^  be  under  farsighted  ("conserva- 
tive") management  with  a  view  to  staving  off  such  competitors. 


65-§S]  COMBINATIONS  AND  TRUSTS  461 

A  more  certain  test  would  seem  to  be  found  in  large  profits,  on  a 
scale  much  beyond  those  expected  under  competitive  conditions. 
Yet  here  too  caution  is  needed.  Large  profits,  of  20  and  30  per 
cent  on  capital  and  more,  are  constantly  secured  in  industries  sub- 
ject to  unfettered  competition;  sometimes  under  the  influence  of  a 
favorable  turn  in  the  market,  more  often  because  of  high  managing 
ability.  None  the  less,  long-continued  high  profits,  on  a  great 
scale  and  spread  over  a  large  capital,  are  suspicious.  Thirty  per 
cent  on  a  capital  of  a  hundred  thousand  dollars  may  not  be  an  un- 
usual return  for  a  man  of  ability;  but  the  same  rate  of  return  on  a 
capital  of  a  million,  still  more  on  a  capital  of  ten  millions  or  a  hun- 
dred millions,  cannot  be  steadily  secured  under  competitive  condi- 
tions. 

Again,  discrimination  in  prices  constitutes,  as  we  have  seen,  a 
symptom  of  monopoly;  yet  here  also  only  if  long  continued  and  on 
a  considerable  scale. ^  Some  discriminations  arise  naturally  from 
competition  and  the  higgling  of  the  market,  from  the  endeavor  to 
stave  off  the  consequences  of  an  oversupply,  from  the  wish  to  in- 
troduce goods  in  a  new  market  without  "spoiling"  the  accustomed 
price  in  the  old.  It  is  only  where  one  set  of  buyers  are  continu- 
ously charged  prices  substantially  higher  than  are  charged  to  others 
that  we  smell  monopoly. 

The  strictly  economic  indications,  however,  are  not  easily  ap- 
plied in  legislation.  I  suspect  that,  certainly  as  a  first  step,  the 
law  must  go  by  the  mere  fact  of  size.  All  large  concerns  —  large  in 
terms  of  capital  or  of  output  —  may  be  compelled  to  conform  at 
least  to  the  requirement  for  report  of  the  simplest  facts,  such  as 
capital,  output,  and  profits.  Such  information,  continuously  se- 
cured for  a  series  of  years,  will  serve  as  the  basis  for  further  inquiry 
and  very  likely  for  further  legislation. 

§  8.  The  American  policy  of  repression  was  long  a  flat  failure. 
For  some  fifteen  years  after  the  passage  of  the  Sherman  Act  of  1890 
the  efi^ect  of  all  the  prohibition  and  penalizing  was  nil.  Not  only 
did  the  old  combinations  go  undistm-bed,  but  in  the  closing  years 
of  the  nineteenth  century  there  was  that  extraordinary  outburst 

iCp.  Chapter  15,  §§4-5. 


462         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [65-§  8 

of  new  combinations  to  which  reference  has  already  been  made. 
The  great  combinations  were  not  driven  into  hiding.  The  busi- 
ness world  went  on  with  its  experiments  and  contests  regardless 
of  the  law  of  the  land. 

Within  a  surprisingly  short  period,  however,  the  situation 
changed.  An  unmistakable  public  opinion  against  trust  "extor- 
tions"—  partly  such  in  reality,  often  exaggerated  —  and  still 
more  against  the  spectacular  emergence  of  vast  fortunes,  not  justi- 
fied under  any  of  the  accepted  economic  canons,  led  the  successive 
administrations  of  Roosevelt,  Taft,  and  Wilson  to  vie  with  each 
other  in  more  and  more  drastic  applications  of  the  law.  A  large 
number  of  combinations,  among  them  conspicuously  the  oil  and 
tobacco  trusts,  were  haled  into  court  and  compelled  to  disband. 
Others  took  the  same  course  rather  than  meet  prosecution.  The 
policy  of  trying  to  crush  monopoly  was  resolutely  put  into  effect. 

None  the  less,  few  thoughtful  persons  believed  that  this  alone 
sufficed  as  a  permanent  policy.  Not  only  those  who  held  combi- 
nation in  some  form  and  under  some  restriction  to  be  the  more  ad- 
vantageous organization  of  industry,  but  also  those  who  were  intent 
on  rigid  suppression,  looked  to  further  legislation,  less  vague  than 
that  of  1890,  and  with  better  administrative  machinery  for  enforc- 
ing its  provisions.  Accordingly  two  important  acts  were  passed 
in  1914.  One,  the  so-called  Anti-Trust  Act,  repeated  the  pro- 
hibitions of  the  act  of  1890,  and  added  further  provisions  designed 
to  prevent  holding  companies,  so-called  interlocking  directorates, 
and  other  devices  for  concealed  combination.  The  second,  more 
novel  and  more  important,  established  a  Federal  Trade  Commis- 
sion, with  large  powers  of  investigation  and  supervision.  Much 
discretion  was  given  the  Commission.  For  example,  it  might  call 
for  reports  —  i.e.  seciu"e  what  may  be  termed  a  "round-up"  of  the 
enterprises  to  be  supervised  —  on  any  principle  or  to  any  extent  it 
saw  fit.  On  the  vexed  question  of  unfair  competition  it  was  also 
given  wide  discretion.  No  attempt  was  made  to  define  what  was 
unfair;  the  Commission  was  simply  given  power  of  quasi-judicial 
inquiry  and  of  issuing  orders,  with  appeal  to  the  courts  in  case  the 
orders  should  be  disputed.     As  in  the  analogous  case  of  railways, 


65-§9]  COMBINATIONS  AND  TRUSTS  463 

the  establishment  of  the  Commission  marked  the  beginning  of  a 
new  era:  a  settled  policy  of  control,  but  no  hard  and  fast  settle- 
ment of  the  precise  methods  by  which  control  was  to  be  exercised. 

§  9.  No  problem  of  public  policy  or  public  regulation  is  solely 
economic.  Thruout,  the  political  aspects  as  well  as  the  economic 
must  be  considered.  The  trust  problem  like  the  others  raises  not 
merely  the  questions  of  supervision,  regulation,  of  fixing  prices  or 
paring  profits,  but  also  those  of  devising  and  working  the  needed 
political  and  administrative  machinery.  The  right  men  must  be 
found,  must  be  given  secure  tenure  and  adequate  remuneration, 
must  be  able  to  carry  out  deliberate  policies  undisturbed  by  popu- 
lar impatience  and  partisan  recrimination.  How  slow  has  been 
progress  in  the  political  organization  of  American  commonwealths 
need  not  be  said  again.  Nor  need  it  be  said  again  that  the  average 
of  intelligence  and  character,  the  stuff  of  which  the  community  is 
made,  constitute  the  foundation  on  which  must  rest  all  political 
and  social  betterment. 

In  almost  all  directions,  it  must  be  confessed,  economic  problems 
have  outgrown  government  capacity  for  dealing  with  them.  Not 
least  is  this  the  case  with  the  trust  problem.  Modern  industry  has 
marched  to  huge  agglomerations,  whose  chiefs  acquire  power  and 
wealth  not  consistent  with  the  ideals  of  democracy  and  equality. 
The  political  agencies  have  not  proved  adequate  to  deal  with  these 
giants.  Public  control  is  imperative;  in  many  directions  public 
ownership  and  management  loom  up  as  inevitable.  But  parlia- 
mentary government,  representative  institutions,  elective  officials, 
divided  jurisdiction  between  central  and  local  authority,  demar- 
cation and  limitation  of  the  powers  of  legislators  and  administrators, 
are  not  adapted  to  cope  with  the  pressing  tasks.  Our  institutions 
have  been  largely  inherited  from  the  days  of  simpler  industry  and 
simpler  society,  from  a  stage  when  power  in  public  personages  was 
feared  and  assumption  of  control  by  the  state  was  deemed  danger- 
ous. Political  traditions  hark  back  to  the  days  of  despots;  economic 
preconceptions  to  those  of  wagons  and  sailing  ships  and  small 
factories.  An  overhauling  of  the  methods  and  principles  of  govern- 
ment is  a  necessary  part  of  every  program  of  reform  for  the  future. 


CHAPTER  66 

Socialism 

Section  1.  Proposals  for  large-scale  socialism  have  superseded  those  for 
isolated  communism.  The  essence  of  socialism  is  economic  transforma- 
tion; changes  in  religion,  the  family,  political  institutions,  are  not  essen- 
tial to  its  program.  Nor  is  violent  change  essential,  464  —  Sec.  2.  Land 
and  capital  to  be  in  public  hands;  not  necessarily  pubhc  property  in  every 
instance.  The  peculiar  problem  as  to  agricultural  land.  Wages  to  be 
the  only  form  of  income.  Exchange  and  money  in  the  socialist  state,  467 
—  Sec.  3.  Guild  socialism;  under  larger-scale  industry,  it  leaves  the 
problems  essentially  the  same,  470  —  Sec.  4.  Three  conceivable  prin- 
ciples of  distribution:  need,  sacrifice,  efficiency,  474  —  Sec.  5.  How  far 
public  ownership,  as  adopted  in  present  society,  is  socialistic;  how  far 
labor  legislation  and  the  like  are  so,  478  —  Sec.  6.  Some  current  objec- 
tions to  socialism  are  of  little  weight;  for  example,  that  the  huge  organi- 
zation is  impracticable,  that  goods  could  not  be  valued,  that  capital  could 
not  be  accumulated.     Would  freedom  disappear?  480. 

§  1.  To  the  socialists,  the  conclusions  of  the  preceding  chapters 
will  seem  not  only  uncertain,  but  childishly  uncertain ;  and  legisla- 
tion such  as  is  there  described  will  seem  a  feeble  palliative  for  a 
deep-rooted  disease.  The  outstanding  fact,  they  say,  is  the  col- 
lapse of  competitive  industry.  Combination  and  monopoly  are 
the  inevitable  result  of  the  machine  processes  and  of  large-scale 
production.  Legislation  cannot  prevent  monopoly,  nor  can  it  pre- 
vent its  concomitant  of  ever  growing  inequality.  The  bourgeois 
economist  only  palters  with  the  situation  when  he  weighs  the  pros 
and  cons  of  competition  and  combination.  The  bourgeois  legis- 
lator, whether  he  tries  to  repress  or  to  regulate  combination,  is 
trifling  with  a  force  that  is  irresistible.  The  evolution  of  indus- 
try necessarily  brings  full-fledged  monopoly.  The  ultimate  out- 
come is  plain:  the  state  will  expropriate  the  monopolists  and  will 
manage  all  large-scale  industry  for  itself.  Socialism  is  the  one  goal 
and  the  one  gospel ;  it  is  the  desirable  and  the  inevitable  end. 

464 


66-§  1]  SOCIALISM  465 

Socialism  proposes  to  do  away  with  the  system  of  private  prop- 
erty, and  especially  with  that  system  so  far  as  it  leads  to  great 
inequalities.  It  proposes,  above  all,  to  do  away  with  the  leism-e 
class,  and  with  incomes  from  interest  or  rent  —  to  allow  only 
incomes  secured  by  labor. 

In  the  first  half  of  the  nineteenth  century,  schemes  for  small- 
scale  socialism  were  rife.  They  contemplated  select  communi- 
ties, oases  in  the  competitive  desert.  There  men,  having  left  the 
selfish  life,  should  share  things  in  common,  without  strife  or  vic- 
tories or  privileges.  Such  communities  have  been  established  in 
many  countries,  most  frequently  in  the  United  States,  where  the 
spirit  of  freedom  and  non-interference,  if  it  has  led  to  great  lengths 
of  individualism,  has  at  least  permitted  men  to  experiment  freely 
with  communism.  Usually  the  societies  or  associations  which  have 
tried  these  experiments  have  been  communistic  in  the  narrower 
sense;  that  is,  all  things  have  been  shared  in  common,  and  all  mem- 
bers have  been  on  one  level  in  respect  of  income.  But  such  com- 
plete leveling  is  not  an  essential  feature.  It  is  quite  conceivable, 
and  not  inconsistent  with  the  ideals  of  the  societies,  that  leaders 
should  be  distinguished  not  only  by  their  position  of  leadership,  but 
in  some  degree  by  their  income  as  well.  Usually,  too,  the  societies 
have  had  a  religious  basis.  This  also  is  not  an  essential  charac- 
teristic; some  have  been  frankly  unreligious.  It  is  true  that  those 
infused  with  a  religious  spirit  have  lasted  longest,  and  have  been 
most  successful  both  in  worldly  and  in  spiritual  waj's.  As  a  rule, 
the  experiments  have  collapsed,  after  a  comparatively  short  period 
of  trial;  yet  a  few,  under  leaders  of  commanding  personality  and 
fervid  religious  spirit,  have  had  long  and  interesting  careers. 
Harmony,  the  Shakers,  the  Oneida  community,  the  Amana 
Society  —  these  are  some  noted  cases  in  the  United  States. 

The  history  of  the  small  communities,  however,  counts  for  little 
in  the  modern  socialist  movement.  Like  most  things  of  to-day, 
socialism  looks  to  large-scale  operations,  not  to  petty  experiments. 
It  proposes  a  complete  transformation  of  all  society.  Machinery 
and  huge  industrial  enterprises,  the  minute  division  of  labor,  the  use 
of  great  plant,  transportation  and  exchange  on  a  great  scale  —  these 


466         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [66-§l 

are  to  continue ;  but  all  under  public  management.     No  corner  of 
society  is  to  be  left  untouched  by  the  process  of  transformation. 

This  transformation  is  to  be  economic  only;  or,  at  least,  accom- 
panied by  other  changes  only  so  far  as  they  may  result  inevitably 
from  those  of  an  economic  sort.  It  is  true  that  many  socialists 
advocate  changes  in  other  great  social  institutions  also  —  in 
religion,  in  the  family,  in  political  organization;  and  to  some  among 
them  such  changes  seem  as  essential  as  changes  strictly  economic. 
Yet  there  is  diversity  of  opinion  on  these  matters;  and  the  socialist 
ideal  does  not  necessarily  lead  to  any  one  policy  regarding  them. 
It  is  conceivable  that  the  socialist  state  should  concern  itself  not 
at  all  with  religion,  as  little  as  does  the  state  in  our  American 
society.  Equally  possible  and  consistent  would  be  support  to  dif- 
ferent denominations,  such  as  that  given  by  German  states.  Prob- 
ably the  majority  among  the  unqualified  socialists  are  frankly 
unreligious;  but  some  deeply  religious  persons,  devoutly  attached 
to  existing  churches,  are  frankly  socialistic.  At  the  least,  complete 
tolerance  of  all  forms  of  worship  and  belief  would  seem  to  be  beyond 
question  in  the  transformed  society.  Again,  in  the  family  and  the 
institution  of  marriage,  no  great  outward  change  seems  to  be  neces- 
sarily implied.  Some  socialists  believe  in  a  looser  connection  be- 
tween the  sexes  than  that  of  marriage  for  life;  but  there  is  no  reason 
why  their  society  should  not  maintain  the  present  relation.  The 
responsibilities  of  parents  to  children,  it  is  true,  would  inevitably 
be  different  from  what  they  now  are  —  of  this  more  will  be  said  in 
the  next  following  chapter.  Still,  marriage,  the  family,  the  home, 
might  be  expected  to  remain  very  much  as  they  now  are.  Nor  is 
any  particular  form  of  political  organization  essential.  Here,  to 
be  sure,  there  is  a  greater  approach  to  unanimity  among  the  social- 
ists than  on  some  other  points.  To  most  of  them  their  economic 
program  seems  the  legitimate  and  inevitable  outcome  of  democ- 
racy. Yet  one  of  the  keenest  among  the  socialists,  Rodbertus, 
looked  to  the  permanent  maintenance  of  a  monarchical  form  of 
government;  and  one  of  the  greatest  of  philosophers,  Comte,  who 
sketched  an  ideal  organization  virtually  socialistic,  believed  that 
it  must  have  an  autocratic  head. 


66-§  2]  SOCIALISM  467 

Lastly,  socialism  does  not  necessarily  imply  revolution  or  vio- 
lence. Most  well-to-do  people  of  the  half-educated  sort  associate 
it  with  the  red  flag  and  a  reign  of  terror;  just  as  most  of  them  find 
no  epithet  of  condemnation  so  conclusive  as  "socialistic."  It  is 
true  that  the  most  influential  socialist  thinker  of  modern  times, 
Marx,  was  frankly  a  revolutionist.  He  believed  that  the  existing 
regime  could  not  be  abolished  without  violence,  and  his  preaching, 
was  inflammatory.  Other  socialist  thinkers,  no  less  ardent,  look  to 
a  peaceful  change;  some  to  a  rapid  one,  even  tho  peaceful;  some 
to  a  slow  evolution  that  will  lead  to  the  transformed  society  by 
gradual,  orderly  steps.  Marx's  own  followers,  tho  loyal  to  his 
general  teaching,  are  now  much  less  truculent  than  was  Marx  him- 
self. The  most  thoughtful  and  kindly  disposed  among  the  social- 
ists —  and  brotherly  love,  rather  than  hatred  or  envy,  underlies 
the  movement  —  look  not  even  to  any  hasty  dispossession  of  the 
present  property-holding  classes.  These  might  be  pensioned  in 
some  way  —  assured  of  their  present  income,  or  at  all  events  of  a 
comfortable  income  for  themselves  during  life  and  even  for  their 
children.  The  indefinite  continuance  of  a  set  of  persons  w^ho  are 
(from  the  socialist  point  of  view)  mere  drones  is  indeed  incon- 
sistent with  socialist  principles;  but  the  process  of  getting  rid  of 
them  may  be  a  gradual  and  peaceful  one,  entailing  no  serious 
suffering  for  any  individual. 

§  2.  The  essential  end  which  socialism  tries  to  attain  is  ajcLange 
in  distribution.  By  way  of  attaining  this,  and  primarily  in  order 
to  attain  it,  the  machinery  of  production  is  to  be  made  over.  More 
accurately  stated,  the  machinery  of  production  is  to  be  turned  over 
to  other  hands  —  transferred  from  its  present  owners  into  the 
ownership  and  management  of  the  state.  All  land,  all  factories, 
workshops,  railways,  all  the  instruments  of  production,  are  to  be 
public  property.  All  the  advantage  which  such  things  bring,  in  the 
way  of  increasing  the  productiveness  of  labor  and  the  output  of  in- 
dustry, are  to  go  to  the  community  as  a  whole.  No  part  of  the 
advantage  is  to  be  got,  as  now,  by  private  owners. 

This  does  not  mean  that  all  ownership  of  property  shall  dis- 
appear.   It  is  sometimes  said  that  socialism  must  fail  because  it 


468  PROBLEMS  OF  ECONOMIC  ORGANIZATION       [66-§2 

runs  counter  to  a  deep-rooted  instinct  of  ownership  and  property, 
showing  itself  from  the  child's  grasping  of  its  toy  to  the  avarice  of 
the  aged.  The  socialists  reply  that,  whether  or  no  there  be  such 
an  ineradicable  instinct,  ownership  is  not  to  disappear.  One  may 
have  one's  own  clothes,  furniture,  and  books  and  household  posses- 
sions, may  save  one's  own  money,  perhaps  even  possess  a  house. 
Only  such  forms  of  consumer's  wealth  as  may  readily  give  rise  to  an 
"unearned"  income  are  to  be  kept  out  of  private  hands.  The 
ownership  of  dwellings,  to  be  let  at  a  rental  by  one  person  to 
others,  could  not  be  permitted;  for  this  spells  inequality  and  a  pos- 
sible privileged  class.  But  it  would  not  be  out  of  the  question 
that  a  person  should  possess  a  house  of  his  own  bought  with  sav- 
ings; as  one  might  own  a  piano  or  a  horse.  These  things  might 
also  be  transmitted  by  inheritance  to  children.  Only  ownership 
of  investments  of  any  kind,  and  dealings  with  things  as  investments 
to  yield  an  income,  would  seem  necessarily  tabooed  —  no  con- 
tracts of  lease  allowed,  or  payments  of  rent  or  interest.  The  details 
of  a  Utopian  community  have  an  attraction  for  many  people  who 
amuse  themselves  by  specifying  just  how  dwellings  might  be  owned 
and  inherited,  how  turned  back  to  the  state  at  a  valuation  if  the 
possessor  wished  to  make  a  change,  how  let  by  the  state  as  universal 
landlord.  So  one  might  speculate  on  the  extent  to  which  sale  or  hire 
of  other  durable  consumer's  goods  might  be  permitted  —  furniture 
or  pianos.  The  essentials  in  regard  to  the  ownership  of  property  in 
the  socialist  state  are  that,  so  far  as  it  is  in  private  hands  at  all,  it 
shall  be  susceptible  of  wide  diffusion,  shall  not  give  rise  to  anything 
in  the  way  of  "  funded  "  income,  and  shall  not  be  cumulative. 

A  curious  change  has  taken  place  recently  in  the  attitude  of  many 
socialists  in  regard  to  land.  The  unrelenting  socialist,  classing 
land  as  obviously  an  instrument  of  production,  would  leave  it  all  in 
the  community's  hands  and  would  have  all  gains  from  it  guarded  for 
the  community.  Of  late  there  are  signs  of  some  withdrawal  from 
this  extreme  position.  The  change  is  due,  especially  in  Germany, 
to  the  impossibility  of  rousing  even  an  interest  in  socialism,  not  to 
mention  adherence  to  it,  among  the  millions  of  small  land  proprie- 
tors.    Each  owner  clings  to  his  few  acres;  and  the  socialists  are 


66-§  2]  SOCIALISM  469 

beginning  to  consider  whether  there  is  any  reason  why  he  should 
not  be  allowed  to.  Private  ownership  of  agricultural  land,  where 
it  is  in  the  hands  of  those  who  themselves  till  it,  gives  rise  to  no 
great  inequalities  and  to  no  considerable  unearned  gains.  On  the 
other  hand,  concentration  not  only  of  ownership  but  of  manage- 
ment in  the  hands  of  the  state  suggests  problems  difficult  in  pro- 
portion to  the  difficulty  of  great-scale  farming.  Why  not  let  the 
small  and  moderate  farm  owners  ("peasant  proprietors")  stay  as 
they  are?  This  would  mean  quantitatively  a  large  breach  in  the 
strict  socialist  doctrine,  but  qualitatively  nothing  to  be  much  re- 
gretted. The  tenure  of  the  farmers  might  be  that  of  lease-holders 
on  long  term,  with  fixed  rentals;  and  the  state  would  surely  reserve 
the  right  to  take  possession  of  the  site  if  it  should  become  unusually 
valuable  {e.g.  thru  the  discovery  of  mines).  Urban  land,  mines, 
manufacturing  sites,  would  in  no  case  be  let  out  of  the  community's 
hands.  Where  large-scale  agricultural  operations  proved  neces- 
sary, they  might  be  undertaken  on  some  sort  of  cooperative  plan. 
Here,  too,  there  is  a  temptation  to  speculate  on  possible  details,  and 
to  work  out  a  Utopia  to  one's  own  satisfaction.  Agricultural  land 
presents  problems  of  its  own  in  existing  society,  and  would  do  so  in 
any  socialist  organization.  Yet  it  may  be  doubted  whether  it 
would  prove  possible  to  retain  the  essentials  of  private  property 
and  management  here,  after  they  had  been  swept  away  elsewhere. 
Distribution  in  the  socialist  state  would  be  in  one  way  very 
simple.  Wages  would  be  the  only  form  of  income.  Rent  and  in- 
terest would  disappear.  There  would  doubtless  be  pensioners  and 
paupers,  but  no  leisure  class  —  no  set  of  able-bodied  persons  living 
in  prosperous  idleness.  Business  profits  would  exist  onlj^  in  a 
strictly  limited  form,  as  wages  of  management.  A  carping  critic 
might  say  that  the  rent  of  land  could  not  really  be  done  away  with, 
since  it  results  necessarily  from  the  inherent  differences  between 
natural  resources  The  socialists  would  have  to  admit  that  in  this 
sense  a  rent  —  a  differential  return  to  some  sorts  of  labor  and  effort 
—  would  remain.  But  the  private  appropriation  of  rent  would 
cease.  The  excess  of  return  on  the  better  sites  would  in  some  form 
or  other  go  to  the  community. 


470         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [66-§3 

Exchange  would  proceed  in  the  sociahst  state  very  much  as  it 
does  now.  Exchange  is  part  of  the  machinery  of  production,  and 
that  is  not  to  be  disturbed.  There  would  be  warehouses  and  shops, 
constant  passage  of  goods  from  factory  to  counter,  daily  purchase 
of  goods  by  consumers.  All  middlemen  and  all  shopkeepers  (virtu- 
ally all  —  might  there  be  exceptions  for  some  hucksters?)  would  be 
"business  men"  in  the  employ  of  the  state  and  receiving  its  wages. 
There  would  be  money,  too;  presumably  metallic  money,  because 
this  is  clean  and  durable.  The  devisers  of  Utopias  have  some- 
times pictured  something  else  —  labor  tickets,  quite  different  from 
the  traditional  sort  of  money.  Things  for  sale  in  the  shops  might 
be  labeled  with  the  amounts  of  labor  which  their  production  had 
involved  —  all  the  labor,  remote  and  near,  direct  and  indirect. 
Each  producer  would  receive  tickets  in  proportion  to  the  amount  of 
the  labor  he  had  performed,  and  would  use  these  tickets  as  money. 
Thus  each  person  would  buy  the  product  of  precisely  as  much  labor 
as  he  had  himself  performed.  Such  an  arrangement  assumes  an 
apportionment  of  wages  on  a  strict  labor  or  sacrifice  basis.  Of  this 
aspect  of  the  case,  more  will  be  said  presently;  certainly  the  de- 
termination of  the  prices  of  goods  would  necessarily  involve  a  prin- 
ciple of  distribution  among  the  wage  receivers.  But  labor  tickets 
and  the  like  fanciful  devices  signify  nothing.  The  essential  things 
would  be  to  have  stable  prices  and  stable  money  incomes  —  no 
rise  or  fall  in  the  value  of  money,  no  problems  of  appreciation  or 
depreciation,  no  crises,  no  dislocation  of  the  machinery  of  exchange. 
The  quantity  of  the  circulating  medium  would  be  adjusted  to  the 
quantities  of  things  bought  and  sold,  and  to  a  given  scale  of  prices 
for  them;  in  a  manner  analogous  to  the  present  adjustment  of  the 
quantity  of  subsidiary  coin  to  the  occasions  for  its  use.  The  prices 
of  things  would  not  adjust  themselves,  as  now,  to  the  quantity  of  the 
circulating  medium.  This  medium  we  may  suppose  to  be  bright, 
clean  gold  and  silver  and  copper  —  or  any  of  them.  But  the 
mining  of  these  metals  as  well  as  the  manufacture  of  the  coins  would 
be  government  operations. 

§  3.  A  variant  of  the  socialist  proposals  which  came  into  vogue 
in  England  during  the  early  years  of  the  twentieth  century  is  that 


66-§  3]  SOCIALISM  471 

for  guild  socialism.  It  looks  to  some  modification  of  the  full  com- 
mand of  industry  by  the  state,  to  a  division  of  powers  and  func- 
tions, to  some  elasticity  in  a  scheme  accused  of  being  too  rigid.  The 
control  and  management  of  industry  are  to  be  in  the  hands  not  of 
the  public  or  its  representatives,  but  of  the  organized  workers. 
The  railway  workers  as  a  group  are  to  operate  the  railways,  the 
coal  miners  the  coal  mines,  the  cotton  operatives  the  cotton  mills, 
and  so  on.  Each  group  is  to  include  not  only  the  manual  workers, 
but  the  clerks,  superintendents,  managers.  The  owners,  as  own- 
ers, are  of  course  to  be  dispossessed  and  property  income  is  to  dis- 
appear. Ownership  of  property,  so  far  as  there  is  any  such  thing, 
is  to  be  vested  in  the  guilds.  The  term  "guild"  is  applied  to  this 
sort  of  organization,  because  it  is  supposed  to  resemble  that  of  the 
medieval  guilds. 

The  association  with  medieval  traditions  implied  in  the  termi- 
nology is  less  significant  than  is  the  relation  to  the  militant  element 
in  the  contemporary  labor  movement.  Within  the  workmen's 
union  there  is  half-concealed  dissension  between  the  more  con- 
servative and  the  more  radical  factions.  The  conservatives  think 
of  the  unions  as  means  primarily  of  strengthening  the  men's  position 
in  the  existing  system.  They  may  admit  socialist  phrases  in  the  pre- 
ambles and  in  the  declarations  of  principle,  but  their  heart  is  not  in 
such  matters.  The  radicals,  often  the  younger  among  the  leaders, 
have  set  their  hearts  precisely  on  these.  For  them  the  bargaining 
union  is  merely  the  preparatory  phase,  the  first  step,  in  the  assault 
on  the  whole  capitalistic  structure.  In  the  labor  organizations  of 
the  Continent,  and  especially  of  France  and  Germany,  this  outlook 
toward  a  fundamental  reordering  was  conscious  and  deliberate 
almost  from  the  start.  In  Great  Britain  the  reins  of  policy  were 
long  held  by  the  less  imaginative,  more  restricted,  more  sober- 
minded,  as  they  were  in  the  United  States  also;  yet  with  a  growing 
tendency  to  reflect  on  what  might  be  the  ultimate  goal.  A  possi- 
ble goal,  readily  indicated  by  the  organization  of  workers  in  the 
existing  unions,  is  the  complete  control  and  management  of  the 
several  industries  by  the  unions.  The  romantic  and  aesthetic  spec- 
ulation, the  moral  idealism  of  the  guild  socialists,  mean  little  to  the 


472         PROBLEMS  OF  ECONOMIC  ORGANIZATION      t66-§3 

revolutionary  unionists;  but  they  are  quite  ready  to  join  hands 
in  subjugating  and  dispossessing  the  capitahsts,  and  developing 
the  existing  institutions  of  the  workers  into  self-governing  bodies, 
each  of  which  shall  own  and  manage  its  own  compartment  in  the 
industrial  system. 

Something  more  must  obviously  be  elaborated  than  this  general 
notion  of  an  individualist  collectivism.  The  several  compart- 
ments must  be  brought  into  relation  with  each  other.  No  group 
could  possibly  be  allowed  to  go  its  own  way  quite  without  let  or 
hindrance.  Some  coordination  must  be  arranged;  some  super- 
vision must  be  exercised  by  a  controlling  general  authority.  The 
proponents  of  the  ideal  do  not  fail  to  face  this  need.  They 
elaborate  schemes  for  general  councils  and  like  representatives  of 
the  public  interest,  which  shall  curb  any  selfish  policies  of  the 
particular  guilds  or  unions,  and  see  to  it  that  all  work  together  for 
the  common  good.  The  details  of  such  schemes  need  not  concern 
us;  they  have  the  same  fascination  and  the  same  futility  as  those  of 
other  Utopias.  Within  the  limits  of  a  book  like  the  present  it  is 
possible  and  profitable  to  consider  only  some  outstanding  aspects. 

In  the  first  place,  it  is  to  be  remarked  that  all  this  is  quite  dif- 
ferent from  producers'  cooperation.  Sometimes  indeed  the  guilds 
have  imagined  a  modest  beginning,  a  preliminary  peaceful  assump- 
tion of  one  corner  of  an  industrial  compartment.  Steps  of  this 
kind  would  be  quite  like  the  endeavors  of  laborers  to  organize  work- 
shops of  their  own  on  a  cooperative  bas's.  Cooperative  enter- 
prises, however,  must  begin  and  must  maintain  themselves  in  com- 
petition with  the  existing  enterprises  of  the  business  world.  They 
must  accumulate  their  own  capital  thru  their  own  savings.  They 
mu  t  submit  to  a  period  of  trial,  and  alas!  must  expect,  in  view  of 
the  almost  universal  experience  of  their  kind,  to  succumb  after  a 
shorter  or  longer  trial.  No;  if  the  displacement  of  the  employing 
capitalists  is  to  be  achieved,  something  much  larger  must  be  set  up, 
more  ambitious,  more  proof  against  an  unequal  competition.  Not 
an  occasional  single  business  within  an  industry,  but  each  industry 
as  a  whole  is  to  form  the  unit  of  organization.  And  all  the  existing 
businesses  are  to  be  taken  over  at  one  swoop,  their  outfit  of  plant 


66- §  3]  SOCIALISM  473 

and  supplies  utilized  as  it  stands;  no  puttering  self-help  by 
struggling  cooperators.  Each  single  great  "guild"  will  have  a 
monopoly  of  its  field.  No  competition  of  any  kind  is  to  remain. 
Tho  this  may  be  in  a  sense  producers'  cooperation,  it  is  exempt 
from  the  trials  and  the  tests  which  in  previous  experience  have 
proved  insuperable  for  that  form  of  organization. 

In  other  words,  large-scale  conduct  of  industry  is  no  less  an  in- 
herent part  of  this  socialist  program  than  of  any  other.  The  guild 
is  a  huge  trust,  more  completely  in  control  of  its  industry'  than  any 
capitalist  trust  ever  has  been.  The  size  of  the  unit  renders  futile 
one  endeavor  which  has  played  a  part  in  the  movement  —  the 
endeavor  to  escape  the  centralization  of  control  under  full  socialism, 
the  intricate  administrative  machinery,  the  bureaucratic  stiffness. 
No  escape  from  these  difficulties  is  offered  by  guild  socialism. 
Under  the  stress  of  modern  technique  and  of  large-scale  operations 
its  problems  can  no  more  be  made  simple  than  those  of  any  plan 
of  public  management. 

With  large-scale  operations  come  two  fundamental  tasks:  the 
establishment  of  a^  wa:gea  system  and  the  selection  of  leadersT"  A 
wages  system  there  must  be,  in  the  sense  of  a  settled  scale  of  re- 
muneration for  men  who  are  working  at  things  which  they  do  not 
themselves  consume.  In  that  sense,  they  must  be  hired.  Hire 
by  profit-seeking  capitalists  is  not  essential;  "wages"  on  the  basis 
of  short-period  and  terminable  engagements  are  not  essential.  A 
sort  of  "salary"  arrangement  is  quite  conceivable.  Somehow, 
nevertheless,  men  must  receive  at  once  the  wherewithal  for  their 
living  while  they  are  at  work  in  the  manifold  stages  of  an  intricate 
division  of  labor.  The  question  of  the  scale  on  which  they  shall  be 
paid  cannot  possibly  settle  itself.  Some  authority,  even  tho  it  be 
of  the  town-meeting  type,  must  arrange  the  terms  on  which  each 
is  to  receive  his  share  of  the  consumable  goods  and  services.  There 
will  be  no  remuneration  except  wages;  yet  the  problem  persists,  on 
what  principle  the  assignment  of  wages  shall  be  made  to  the  several 
individuals  and  the  several  t^-pes  of  workers. 

And  leadership  there  must  be.  The  huge  machine  will  not  run 
itself.     Some  one,  some  group,  must  be  in  command.     Discipline 


474         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [66-§4 

there  must  be,  a  tautness  of  organization,  obedience  to  the  orders 
of  superiors.  Who  shall  select  the  leaders,  and  what  promise  is 
there  that  those  qualified  for  leadership  shall  be  chosen? 

These  requirements  cannot  be  escaped.  No  spontaneous  or  self- 
regulating  organization  is  to  be  conceived  as  possible.  The 
notions  of  the  eighteenth-century  optimists,  that  the  inherent 
goodness  of  men,  once  released  from  the  trammels  of  an  artificial 
society,  will  lead  each  to  fly  to  his  proper  station  and  do  his  proper 
task  —  all  this  is  no  longer  worth  discussing.  Leadership  and  di- 
rection and  organization,  that  is,  bureaucracy  of  some  sort,  there 
must  be,  under  private  ownership  and  management  or  under  pub- 
lic, under  communism  or  state  socialism  or  guild  socialism.  And, 
to  repeat,  some  principle  of  remuneration  must  be  set  up.  The 
apportionment  of  income  must  be  settled.  How  are  we  to  con- 
ceive that  these  requirements  shall  be  met? 

§  4.  The  crucial  question  of  distribution,  then  —  in  fact,  the 
only  question  of  distribution  in  a  socialist  state  —  would  be  that 
of  wages.  On  what  basis  is  the  pay  of  different  sorts  of  workers  to 
be  fixed?  There  are  three  conceivable  principles  of  apportion- 
ment:  need,  sacrifice,  efiiciency. 

Distribution  according  to  need  would  be  the  simplest  of  all;  for 
it  would  mean  that  all  shared  alike.  It  is  true  that  men's  capaci- 
ties for  enjoyment  are  different,  and  their  needs  correspondingly 
different.  Some  are  sensitive  by  nature;  to  such,  plain  fare  and 
cheerless  surroundings  will  always  be  more  distressing  than  to  the 
average  man,  and  ampler  means  will  be  a  greater  source  of  pleas- 
ure. And  apart  from  differences  in  sensitiveness,  he  who  works 
with  his  brains  doubtless  needs,  for  full  efiiciency,  better  surround- 
ings and  greater  variety  in  occupation  than  the  manual  worker. 
But  considerations  like  these  could  not  seriously  affect  the  general 
consequence  that  distribution  according  to  needs  would  lead  to  vir- 
tual equality.  The  seeming  diversities  in  the  keenness  of  desire 
and  enjoyment  are  due  chiefly  to  habituation.  Those  bred  to  com- 
fort and  refinement  are  sensitive  because  they  have  been  made  so. 
The  socialist  state  could  pay  no  attention  to  such  differences. 
And  tho  it  might  logically  pay  attention  to  other  differences  not 


66-§  4]  SOCIALISM  475 

due  to  the  established  habits  of  far-separated  social  classes  —  to 
differences  between  weak  and  strong,  between  sensitive  and  coarse 
persons  —  the  divergences  from  the  rule  of  equality  could  hardly 
be  considerable.  Still  less  could  they  be  made  acceptable  to  the 
rank  and  file.  There  is  no  way  of  measuring  how  far  differences 
in  capacity  for  pleasure  are  real,  how  far  fanciful.  Virtually,  dis- 
tribution on  the  basis  of  need  would  mean  that  all  should  share 
alike. 

This  is  perhaps  the  highest  ideal;  it  conforms  to  the  highest 
pitch  of  altruism.  It  has  usually  been  accepted  in  the  communis- 
tic societies  which  have  been  under  strong  religious  influence.  It 
is  more  or  less  consciously  the  ideal  of  those  who  find  "socialism" 
in  the  teachings  of  Christ.  But  it  is  not  proposed,  at  least  not 
overtly,  by  most  socialists.  Many  persons  think  that  leveling  is 
an  essential  part  of  socialism.  Great  mitigation  of  existing  in- 
equalities does  seem  to  be  universally  demanded  by  socialists;  and 
a  lurking  predilection  for  complete  equality  is  found  in  the  usual 
propaganda.  Nevertheless,  almost  all  socialists  have  in  mind, 
even  tho  vaguely,  some  differentiation  in  the  individual  incomes. 

The  second  principle,  of  sacrifice,  means  that  men  should  be 
paid  in  proportion  to  the  irksomeness  of  their  labor.  If  all  labor 
were  equally  severe  and  equally  distasteful,  this  would  mean  that 
men  should  be  paid  in  proportion  to  the  time  (hours  and  days)  of 
their  labor;  for,  on  the  whole,  a  day's  labor  or  an  hour's  labor 
means  as  much  to  one  man  as  to  another.  The  principle  of  sacri- 
fice as  measured  by  labor-time  underlies  the  notion  of  an  intrinsic 
or  necessary  value  in  commodities,  resulting  from  the  incorporation 
of  labor  in  them.  Marx  had  a  doctrine  of  this  sort.  Value  was 
said  to  be  so  much  embodied  labor,  a  kind  of  labor-jelly;  value  being 
regarded  not  as  a  mere  matter-of-fact  phenomenon  in  exchange,  but 
as  a  something  inherent  in  economic  goods.  Quantity  of  labor  — 
such  quantity  as  is  ordinarily  and  reasonably  necessary  —  was  sup- 
posed to  settle  this  inherent  value.  The  doctrine  really  has  in 
mind  the  principle  that  goods  ought  to  be  exchanged  in  proportion 
to  the  labor  needed  for  producing  them ;  and  this,  again,  means  that 
all  labor  ought  to  be  remunerated  on  the  same  basis;  hence  that 


476         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [66-§4 

differences  in  duration  and  disagreeableness  of  labor  should  alone 
be  the  occasion  for  differences  in  its  remuneration.  In  such  a 
mechanism  of  exchange  as  was  referred  to  in  the  preceding  sec- 
tion (the  use  of  labor  tickets),  goods  would  be  valued  according  to 
the  quantity  of  "socially-necessary"  labor  involved  in  their  pro- 
duction, and  sold  on  that  basis. 

In  a  scheme  for  an  ideal  society,  which  was  much  discussed  some 
years  ago,i  it  was  proposed  that  all  laborers  should  be  paid  at  the 
same  rate,  but  that  the  hours  of  work  in  different  occupations 
should  be  adjusted  in  such  way  as  to  make  sacrifice  or  irksomeness 
the  same  for  all.  Let  the  pleasant  sorts  of  labor  have  long  hours 
—  those  of  superintendence  and  government,  for  example,  since 
"bossing"  seems  always  to  be  agreeable.  Let  the  dirty  and  heavy 
labor,  such  as  mining  and  ditch  digging,  have  short  hours.  Read- 
just the  hours  if  it  should  appear,  from  the  deficiency  or  excess  of 
applications  for  the  several  employments,  that  this  handicapping 
by  the  length  of  working  time  was  not  accurate.  The  proposal  is 
no  more  to  be  taken  as  an  essential  part  of  socialism  than  any  other 
detail  in  the  sketches  of  Utopia.  But  it  brings  out  clearly  the  prin- 
ciple of  equality  of  sacrifice :  not  pay  at  the  same  rate  for  all,  but 
pay  at  such  rates  as  to  bring  the  same  sacrifice  for  all. 

Equality  of  sacrifice  rests  on  an  ideal  of  liberty.  Sacrifice, 
hardship,  irksomeness,  are  subjective  feelings.  They  can  be  meas- 
ured only  by  giving  men  choice  of  what  they  shall  do,  and  judg- 
ing of  their  feelings  according  to  that  choice.  Tacitly  the  assump- 
tion is  that  equality  exists  in  the  capacities  of  men,  and  that  all  can 
turn  at  will  to  the  several  sorts  of  labor;  or,  at  least,  enough  per- 
sons can  turn  freely  to  make  it  perfectly  feasible  to  get  a  full  quota 
for  each  sort.  If  we  assume  that  all  men  have  the  same  inborn 
abilities,  and  that  there  are  no  obstacles  to  free  choice  of  occupation 
from  custom,  expense  of  preparation,  or  social  environment  — 
then  precisely  this  kind  of  adjustment  of  wages  would  ensue  in  an 
individualistic  society.  The  only  differences  would  be  those  that 
served  to  offset  the  varying  disagreeableness  of  different  sorts  of 
labor.2 

1  Bellamy's  Looking  Backward  (1888). 

2  Compare  what  is  said  of  differences  of  wages,  above,  Chapter  47. 


66-§  4]  SOCIALISM  477 

Very  dissimilar  is  the  third  principle,  that  of  remuneration  ac- 
cording to  efficiency.  This  says  that  each  man  shall  be  rewarded 
in  accord  with  his  contribution  to  the  social  income.  The  able, 
strong,  and  alert  shall  get  more,  the  dull  and  weak  less.  The  out- 
come would  be  in  many  cases  quite  the  opposite  of  that  from  the 
principle  of  needs,  under  which  the  strong  are  likely  to  get  less, 
the  weak  to  get  more. 

Remuneration  according  to  efficiency  seems  to  most  persons 
just.  We  think  it  right  that  he  whose  work  accomplishes  more 
shall  get  more  pay,  that  an  efficient  man  shall  be  paid  at  a  higher 
rate  than  an  inefficient  one.  The  principle  assumes,  too  —  tho 
this  assumption  often  is  not  consciously  made  by  those  who  reason 
on  it  —  that  efficiency  is  not  the  same  for  all,  some  having  greater 
capacity  than  others.  Remuneration  according  to  sacrifice  tacitly 
assumes  perfect  liberty  of  choice;  remuneration  according  to  effi- 
ciency tacitly  assumes  that  not  all  men  can  do  all  things,  and  that 
not  all  are  equally  sedulous. 

The  ready  acceptance  of  efficiency  as  a  just  basis  of  reward  is 
the  result  of  its  being  the  basis  on  which  reward  in  now  in  fact  ad- 
justed. In  existing  society  men  are  paid  for  labor,  on  the  whole, 
according  to  what  they  contribute  to  society;  or,  to  be  accurate, 
according  to  the  marginal  contribution  of  their  sort  of  labor  On 
this  matter,  as  on  others,  most  persons  accept  as  just  that  to 
which  they  are  habituated.  The  real  ground  on  which  remunera- 
tion according  to  efficiency  is  to  be  justified  is  the  utilitarian  one. 
It  spurs  every  man  to  contribute  his  utmost.  The  argument  for 
it  is  the  argument  from  the  bribe.  On  the  most  altruistic  ethical 
standard,  there  is  no  reason  why  the  strong  man  should  get  more 
than  the  weak;  nay,  rather,  there  is  ground  for  his  sharing  freely 
with  the  weak.  The  reason  why  he  should  get  more  is  simply  that, 
unless  he  is  so  rewarded,  he  is  not  likely  to  exert  his  strength.  In 
the  end  —  this  is  the  essence  of  the  argument  —  all  men  are  better 
off  when  each  is  induced  to  contribute  his  utmost.  If  indeed  all 
men  are  born  with  equal  gifts  and  have  equal  opportunities,  the 
final  result  will  be  the  same  as  under  the  second  principle  —  all 
will  be  paid  in  proportion  to  sacrifice.     Every  one  will  be  spurred 


478         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [6&-§5 

to  turn  his  labor  to  the  occupations  which  are  highly  rewarded ;  in 
these,  numbers  will  increase  and  reward  then  will  diminish;  ulti- 
mately, only  those  differences  will  remain  which  correspond  to 
differences  in  irksomeness.  But  if  there  are  inborn  differences  in 
capacity,  some  men  will  always  get  more  than  others,  even  tho 
opportunities  be  the  same  for  all.  The  resulting  inequalities  must 
be  accepted  as  necessary  in  order  to  induce  every  man  to  exercise 
his  own  faculties,  and  to  exert  himself  in  acquiring  by  training  and 
assiduity  those  faculties  which  bring  about  high  efficiency  and  high 
reward. 

Not  many  advocates  of  socialism  have  expressed  themselves 
clearly  on  this  fundamental  question:  what  is  the  just  or  ideal 
apportionment  of  reward  for  labor?  Often  they  think  loosely  and 
fail  to  discriminate  among  the  possibilities.  The  trend  among 
them,  on  the  whole,  is  toward  the  second  principle  ■ —  that  of  remu- 
neration according  to  sacrifice.  Strong  as  is  the  underlying  "pro- 
test against  inequality,  few  would  accept  squarely  and  without 
qualification  the  first  principle  —  that  of  equality.  Few,  again, 
would  be  willing  to  accept  all  the  consequences  of  the  third  prin- 
ciple. Often  they  ignore  inborn  differences,  believing  in  the  per- 
fectibility of  men;  and  in  any  case  the  great  differences  which  flow 
from  eward  according  to  efficiency  would  not  be  in  accord  with 
their  general  striving  for  equality.  Tho  only  half  conscious  of 
doing  so,  the  socialists  are  apt  to  propose  or  imply  some  sort  of  com- 
promise: some  inequality,  but  not  very  much;  some  adjustment 
to  efficiency,  but  not  so  much  as  to  lead  to  marked  inequality.  Df 
the  diflSculties  and  problems  which  must  emerge,  more  will  be  said 
in  the  next  chapter. 

§  5.  Before  further  consideration  of  the  meaning  and  possibili- 
ties of  socialism,  it  may  be  pointed  out  wherein  socialism  differs 
from  public  ownership,  and  from  the  humanitarian  legislation 
which  is  often  described  as  "socialistic." 

Public  ownership  does  not  mean  socialism  as  to  distribution, 
that  is,  as  to  the  thing  essential.  The  state,  in  owning  and  operat- 
ing railways,  proceeds  in  much  the  same  way  as  a  private  com- 
pany does.     It  pays  high  salaries  to  the  managers  at  the  head,  less 


66-§  5]  SOCIALISM  479 

salaries  to  subordinate  officials,  ordinary  wages  to  mechanics  and 
unskilled  laborers  —  thruout  on  a  scale  like  that  prevailing  in  the 
world  outside.  No  doubt,  there  is  a  tendency  to  mitigate  existing 
inequalities.  The  higher  officials  often  get  less  than  persons  of 
the  same  capacity  would  get  in  private  employment;  tho  this, 
again,  has  not  infrequently  the  result  that  the  officials  are  not  in 
fact,  as  they  are  supposed  to  be  and  ought  to  be,  of  the  same 
capacity  as  those  in  private  employ.  In  democratic  countries  the 
mechanics  and  unskilled  laborers  are  often  paid  more  than  they 
would  be  paid  by  private  employers.  These  are  no  more  than 
differences  in  degree,  however,  and  rest  on  no  clearly  conceived 
principle.  As  a  general  rule,  the  existing  differences  of  wages  are 
accepted  in  public  business  management. 

Again,  public  ownership  does  not  do  away  with  the  leisure  class. 
When  the  state  turns  to  railway  ownership  and  operation,  it  buys 
out  the  private  owners,  who  thereafter  receive  their  income  from 
other  investments.  Such  purchase  often  results  simply  in  an  ex- 
change of  public  securities  for  corporate  securities.  The  same 
consequence  ensues  when  the  state  sets  out  to  own  great  works 
from  the  beginning  (as  the  Australian  colonies  did  in  building 
their  railways).  It  then  borrows  the  funds,  and  pays  interest  to 
the  creditors.     The  leisure  class  still  gets  its  income. 

No  doubt  it  is  true  that  public  ownership  means  an  endeavor  to 
mitigate  inequalities  in  distribution.  Monopoly  returns  are  to  be 
done  away  with,  or  (what  comes  to  the  same  thing)  are  to  be  appro- 
priated by  the  community.  This  is  by  no  means  inconsistent  with 
the  conduct  of  the  great  mass  of  industrial  operations  by  private 
hands,  with  all  the  resulting  phenomena  of  private  property  — 
inequalities  in  earnings,  savings  and  accumulation,  investment, 
a  leisure  class,  a  stratified  society.  There  is  a  vast  difference  be- 
tween the  mitigation  of  present  inequalities  and  the  complete  re- 
moval of  the  causes  which  lead  to  the  inequality  characteristic 
of  the  existing  regime. 

Similarly,  the  whole  series  of  social  reforms,  from  the  regulation 
of  the  large-scale  industries  to  factory  legislation  and  old-age  pen- 
sions, has  a  limited  range.     It  looks  also  to  the  mitigation  of  ine- 


480         PROBLEMS  OF  ECONOMIC  ORGANIZATION       [G6-§5 

qualities  and  of  the  results  of  inequalities.  All  these  measures 
serve  to  determine  the  plane  on  which  competition  shall  proceed 
without  putting  an  end  to  competitive  bargaining  or  competitive 
returns.  Factory  legislation,  for  example,  workmen's  insurance, 
even  minimum  wages,  fix  the  limits  within  which  the  bargains 
shall  be  adjusted,  but  do  not  attempt  to  settle  the  bargainings. 
The  case  would  be  different  if  the  state  were  to  go  to  the  point  of 
actually  fixing  wages,  say  by  a  method  of  compulsory  arbitration. 
This,  as  has  been  said  already,  involves  a  principle  more  far- 
reaching  than  the  other  forms  of  labor  legislation ;  since,  carried  to 
its  logical  conclusion,  it  calls  on  the  state,  by  fixing  wages  once 
for  all,  to  settle  the  other  elements  of  distribution  as  well  as 
wages.i 

It  may  be  said,  of  ( ourse,  that  all  these  things  —  public  owner- 
ship, regulation  of  industry,  labor  legislation  —  rest  on  the  same 
principles  and  ideals  as  socialism,  that  they  look  in  the  same  direc- 
tion, and  that  they  will  lead  ultimately  to  a  socialistic  state.  They 
do  rest  on  the  same  or  similar  impulses  —  a  wider  altruism,  a  grow- 
ing impatience  with  great  inequalities.  So  far  they  look  in  the 
§ame  direction.  Their  ultimate  outcome  is  by  no  means  neces- 
sarily the  same.  That  outcome  may  be  a  purified  and  better 
society,  still  organized  on  a  basis  of  property  and  of  free  bargaining. 
Oddly  enough,  the  advocates  of  socialism  and  its  extreme  oppo- 
nents alike  have  a  vague  and  all-embracing  conception  of  the 
movement,  the  former  by  welcoming  every  step  for  reform  as  "  so- 
cialistic," and  the  latter  by  stigmatizing  with  the  same  name  every 
measure  to  which  they  object.  Little  is  gained  by  such  discussion 
toward  understanding  the  problems  really  involved  in  the  scheme 
of  a  radical  reorganization  of  society. 

§  6.   Some  current  objections  to  socialism  are  easily  met. 

It  is  said  that  the  scheme  is  too  huge,  the  difficu'ty  of  organiza- 
tion insuperable,  the  actual  operation  sure  to  break  down  because 
of  the  extent  and  complexity  of  the  industrial  problems.  The 
large-scale  enterprises  of  modern  times  go  far  to  dispose  of  this 
objection.  The  possibilities  of  organization  have  been  proved  to 
J  See  above,  Chapter  59,  §  6. 


66-§6]  SOCIALISM  481 

be  immense.  When  we  see  how  railways  and  industrial  enter- 
prises are  successfully  conducted  on  a  vast  scale  under  unified 
management,  we  cannot  say  that  the  mere  difficulties  of  manage- 
ment and  operation  would  be  insuperable  under  socialism.  In 
fact,  many  of  the  problems  of  production,  exchange,  transpor- 
tation would  be  simplified.  Fluctuations  and  uncertainties  would 
largely  disappear.  Only  the  nevitable  irregularities  of  the  seasons 
would  have  to  be  reckoned  with.  Overproduction  of  any  one 
commodity  could  easily  be  set  right,  by  simply  waiting  until  the  ex- 
isting supply  was  disposed  of.  There  could  be  no  ruinous  under- 
bidding by  frantic  competitors,  each  rushing  to  market  in  the  fear 
that  the  other  would  undersell.  It  is  true  that  the  system,  order, 
regularity,  which  the  socialists  may  fairly  claim  as  belonging  to 
their  society-,  may  mean  also  stagnation  —  the  cessation  not 
only  of  change,  but  of  progress.  This,  however,  amounts  to  saying 
not  that  administration  and  management  are  impracticable,  but 
that  they  would  not  be  as  progressive  as  they  might  be. 

Again,  there  would  seem  to  be  no  insuperable  difficulties  in  the 
way  of  valuing  commodities  in  the  socialist  state.  The  pricing  of  the 
goods  on  sale  would  involve,  to  be  sure,  not  only  accurate  book- 
keeping (of  the  cost-account  sort),  but  the  determination  of  the 
wages  of  the  laborers  engaged  in  the  several  branches  of  production. 
In  other  words,  it  would  presuppose  a  scheme  of  distribution 
among  the  laborers.  This  as  already  intimated,  and  as  will 
presently  be  further  shown,  is  a  crucial  matter.  But  supposing 
the  principle  or  standard  to  be  settled,  the  next  step,  that  of  fixing 
a  price  for  the  goods  produced  by  different  kinds  of  labor  or  dif- 
ferent combinations  of  labor,  is  not  more  troublesome  than  it  is 
now  for  a  great  manufacturing  establishment.  Often  enough,  in 
existing  industrial  organization,  figures  of  cost  and  price  can  be 
reached  only  with  approximation  to  accuracy;  and  this  reasonable 
approximation  suffices. 

Nor  would  "the  accumulation  of  capital"  be  a  matter  of  crucial 
difficulty.  It  would  simply  proceed  by  a  different  process  from 
that  of  present  society;  not  by  savings  and  investments  of 
individuals,  but  by  the  deliberate  setting  aside  of  part  of  the  com- 


482         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [66-§  6 

munity's  resources  for  new  construction.  As  at  present,  it  would 
depend  on  the  existence  of  a  surplus,  an  excess  over  what  may  be 
used  for  satisfying  current  wants.  In  this  sense,  there  would  be 
"abstinence"  and  saving  in  the  socialistic  state.  It  would  be 
"abstinence,"  however,  not  by  a  comparatively  few,  but  by  all. 
Each  and  every  individual  would  have  his  present  income  cur- 
tailed somewhat,  in  order  that  provision  might  be  made  for  adding 
to  the  outfit  of  the  community  Success  in  making  such  a  pro- 
vision would  depend,  of  course,  on  the  possession  of  a  fairly  high 
level  of  income;  that  is,  on  an  existing  high  productivity  of  labor. 
Given  a  sufficient  present  income,  there  would  be  no  difficulty  in 
setting  aside  something  for  addition  to  the  community's  capital. 
The  serious  problem  would  be  whether  there  would  be  continued 
progress  and  invention,  not  whether  there  would  be  the  means  for 
carrying  out  inventors'  projects. 

It  is  often  said  that  socialism  would  be  destructive  of  liberty. 
Yet  for  the  great  majority  of  mankind,  freedom  might  be  no  less 
than  it  now  is.  Most  men  now  find  the  nature  of  their  occupations 
fixed  for  them.  Their  daily  round  is  settled  virtually  without  choice 
of  their  own.  Change  from  one  occupation  to  another  of  a  similar 
grade  would  seem  to  be  no  more  difficult  of  arrangement  in  the 
socialist  state  than  in  our  own.  If  the  dreams  of  the  socialists 
come  true,  there  would  be  shorter  hours  for  ail,  and  more  leisure. 
But  greater  freedom  in  this  sense  is  not  unattainable  in  existing 
society.  If  the  dreams  of  the  non-socialists  come  true,  toil  will  be 
less  all-absorbing,  free  time  more  plentiful.  For  the  mass  of  men, 
it  is  not  clear  that  on  the  score  of  liberty  there  is  a  preponderance 
of  gain  under  either  system. 

Whether  persons  of  unusual  gifts  would  have  greater  freedom, 
is  again  not  easy  to  say.  Unless  real  freedom  could  be  secured 
for  them,  real  opportunity  for  development,  no  dreams  of  the 
socialists  could  come  true.  A  stiff  and  bureaucratic  socialism  — 
and  danger  there  is  of  crass  bureaucracy  —  would  stifle  individu- 
ality. This  is  a  matter  of  the  kindling  of  ambition  and  emulation, 
the  selection  of  leaders,  the  maintenance  of  progress  —  difficulties 
which,  as  will  presently  appear,  are  the  crucial  ones. 


6(>-§  6]  SOCIALISM  483 

Obviously,  there  wouid  be  loss  of  freedom  for  many  who  now  are 
privileged.  The  commonplace  persons  of  the  well-to-do  class, 
with  an  "independence"  of  their  own  to  fall  back  on,  would  have 
less  choice  of  occupation,  less  chance  for  experiment,  less  freedom 
as  to  their  mode  of  life.  The  abolition  of  the  regime  of  privilege 
would  necessarily  destroy  some  advantages  of  the  privileged. 
That  elegant  freedom  now  enjoyed  by  the  possessors  of  large 
funded  incomes  would  disappear  completely. 

We  are  so  habituated  to  the  ways  and  traditions  of  present  soci- 
ety that  we  cannot  easily  imagine  what  those  of  a  society  essentially 
different  would  be.  There  is  no  such  thing  as  unrestrained  free- 
dom. Men  live  now  within  limits  set  not  only  by  the  need  of  earn- 
ing their  living,  but  by  law,  by  custom,  by  the  environment.  In 
the  socialist  state  there  would  be  necessarily  restrictions,  also,  in 
some  respects  similar,  in  some  respects  different.  A  bureaucratic 
and  semi-military  socialism  is  conceivable  which  would  crush  in- 
dividuality. A  regulated  and  refined  system  of  private  property  is 
conceivable,  with  unfettered  freedom  of  opportunity,  in  which 
there  would  be  a  completeness  of  liberty  hardly  to  be  attained  in 
any  socialist  state.  If  we  conceive  the  summum  honum  to  be  the 
full  development  of  personality,  we  must  hesitate  before  saying 
which  sort  of  social  organization  gives  the  promise  of  the  best 
happiness. 


CHAPTER  67 
Socialism,  continued 

Section  1.  The  family  and  the  problem  of  population  under  socialism.  The 
Malthusian  difficulty  a  real  one,  484  —  Sec.  2.  Vigor  and  efficiency 
among  the  rank  and  file.  The  absence  of  the  power  of  discharge.  The 
irksomeness  of  labor,  486  —  Sec.  3.  Leadership  and  the  ways  of  securing 
it.  The  love  of  distinction;  can  it  be  satisfied  by  the  laurel  wreath? 
Mixture  of  higher  and  lower  aspects  in  the  love  of  distinction.  The 
possible  growth  of  altruism,  488  —  Sec.  4.  The  selection  of  leaders  in  a 
socialist  state.  Genius  and  originality  likely  to  be  deadened,  490  —  Sec.  5. 
Material  progress  thru  the  improvement  of  capital  likely  to  be  checked. 
Is  a  change  in  distribution  alone  now  needed;  can  advance  in  production 
be  neglected?  492  —  Sec.  6.  The  problem  is  essentially  one  of  motive  and 
character.  Human  nature  and  ideals  of  emulation  and  distinction  are 
subject  to  change.  Tho  socialism  and  current  movements  of  reform  rest 
on  the  same  force,  the  difference  in  degree  is  vast,  493  —  Sec.  7.  Is 
socialism  to  be  the  ultimate  outcome  of  social  evolution?  The  material- 
istic interpretation  of  history  and  its  prophecies.  The  certainty  that 
change  will  be  gradual  and  the  impossibility  of  foreseeing  how  far  it  will 
finally  go,  497. 

§  1.  Let  us  now  consider  some  difficulties  in  the  way  of  socialis- 
tic organization  which  are  more  serious. 

Tho  socialism  would  not  destroy  the  home  or  the  family,  it  would 
bring  domestic  relations  very  different  from  those  with  which  we 
are  familiar.  The  socialists  are  justified  in  scoffing  at  the  bugbear 
of  phalansteries  and  barracks,  with  supposed  gigantic  nurseries 
—  quasi-incubators,  in  which  children  would  be  reared  without 
parental  love  or  guidance.  Yet  inevitably  the  family  would  be  in 
an  environment  very  different  from  that  of  the  present,  its  influ- 
ence much  diminished,  the  relations  of  parents  to  children  greatly 
modified,  the  problem  of  population  more  ominous. 

Education  and  training,  it  would  seem  must  be  completely 
under  state  control.  The  training  of  the  young  and  their  prepara- 
tion for  a  career  in  life  could  not  be  left  to  the  discretion  of  parents. 

484 


67-§l]  SOCIALISM  (Continued)  485 

At  the  least,  it  would  be  subject  to  minute  public  control.  And, 
on  the  other  hand,  the  responsibility  of  parents  for  the  future  of 
their  children  would  virtually  cease.  Every  child  would  not  onlj^ 
be  taught  the  fundamental  things,  but  properly  fed  and  cared  for. 
Its  education  would  be  pushed  as  far  as  the  constituted  authori- 
ties might  deem  worth  while.  And  a  necessary  corollary  would 
seem  to  be  that  every  child  should  be  assured  employment,  and 
as  good  an  opportunity  for  earning  an  income  as  any  other  child  of 
like  promise. 

Malthusianism  was  held  up  by  the  economists  of  a  generation 
ago  as  an  insuperable  obstacle  to  any  collectivist  scheme.  The 
socialists  have  commonly  pooh-poohed  it.  It  is  none  the  less  real. 
The  decline  in  the  birth  rate  and  the  lessening  pressure  of  popula- 
tion which  appear  in  the  highly  civilized  countries,  are  the  conse- 
quences of  individualism  and  the  regime  of  property.^  These  ten- 
dencies, salutary  on  the  whole,  rest  on  stirred  social  ambition  more 
than  on  any  other  force.  They  are  due  to  the  present  position  of 
the  family,  to  hope  for  the  future  of  one's  children,  to  the  desire 
to  rise  in  the  social  scale.  It  has  been  shrewdly  said  ^  that  the 
natural  man  has  only  two  primal  passions  —  to  get  and  to  beget. 
The  desire  to  beget  is  now  held  in  check  by  the  desire  to  get.  That 
removed,  what  would  check  multiplication? 

This  is  a  thorny  subject,  not  often  entered  on  C00II3'  and  openlj- 
either  by  the  socialists  or  their  opponents.  Man  the  animal  tends 
to  multiply  like  other  animals,  and  when  he  does  so  encounters 
essentially  the  same  obstacles  as  other  animals.  Regulation  and 
relaxation  of  the  tendenc}^  to  increase  are  imperative,  yet  are 
fraught  with  dangers  —  physiological  and  moral  as  well  as  social. 
These  dangers  and  evils  are  ominous  in  existing  society.  So  fun- 
damentally different  would  be  a  collectivist  organization  that  it 
would  be  rash  to  predict  just  what  dangers  could  be  avoided 
in  it,  just  what  would  be  inevitable.  I  cannot  but  fear  that  some 
coarse  and  mechanical  regulation  of  the  sexual  relations  would 
have  to  be  resorted  to;  a  formal  retention,  no  doubt,  of  monogamy 

1  See  Chapter  64. 

2  Bj'  Dr.  Osier,  Science  and  Immortality,  p.  10. 


486         PROBLEMS  OF  ECONOMIC  ORGANIZATION      [67-§2 

and  of  family  obligations,  yet  without  those  concomitants  which 
now  make  the  family  a  safeguard  for  public  and  private  well-being. 
The  sexual  relations  are  made  pure  and  sweet,  and  safe  for  society, 
not  only  by  the  marriage  tie  and  the  lawfulness  of  monogamy,  but 
by  care  and  responsibility  for  the  offspring.  Without  that  respon- 
sibility and  all  the  ambition  and  affection  that  go  with  it,  the  ani- 
mal instinct  bodes  vast  dangers.  The  domestic  relations  which 
now  enshrine  it  are  highly  unselfish  within  the  narrow  range  of  the 
family,  but  highly  selfish  as  regards  the  rest  of  the  world.  In 
their  essence,  they  are  individualistic ;  and  it  is  their  very  individ- 
ualism  and  selfishness  which  cause  them  to  work  to  social  ad- 
vantage. It  is  hardly  conceivable  that  any  new  development  of 
public  opinion,  any  new  regulation  by  public  authority,  any 
decreeing  of  childless  monogamic  unions,  should  replace  the  re- 
straints, the  sanctions,  the  motives  for  both  industry  and  economy 
which  the  individualistic  family  gathers  about  it  under  conditions 
of  free  opportunity  and  of  hope  for  the  future. 

§  2.  The  maintenance  of  vigor,  efficiency,  and  progress  presents 
problems  no  less  troublesome,  both  as  to  the  rank  and  file  and  as 
to  the  leaders. 

For  the  rank  and  file,  some  among  the  difficulties  in  the  exist- 
ing order  of  things  would  indeed  disappear.  There  would  be  no  in- 
ducement to  "make  work"  or  oppose  improvements.  The  fear 
of  unemployment,  which  is  the  main  cause  of  the  disposition  to 
adopt  such  policies  of  restriction,^  could  not  have  influence  in  the 
socialist  state.  The  laborers  who  were  no  longer  needed  in  one  oc- 
cupation or  in  one  locality  would  be  transferred  elsewhere;  if  im- 
mediate utilization  proved  not  feasible,  with  no  oss  or  suffering 
during  the  transition.  There  would  be  no  inducement  for  making 
any  job  last. 

On  the  other  hand,  there  would  also  be  no  right  of  discharge; 
none,  certainly,  that  could  be  exercised  with  effect,  least  of  all  in  a 
democratic  community.  Criminals,  tramps,  ne'er-do-wells,  would 
indeed  be  comparatively  easy  to  deal  with.  They  could  be  im- 
mured, kept  from  breeding,  and,  if  beyond  redemption,  got  out 

1  See  above,  Chapter  52,  §  3. 


67- §2]  SOCIALISM   {Continued)  487 

of  the  way  painlessly.  The  serious  problems  would  be  presented 
by  the  rank  and  file  of  men,  not  hopelessly  bad,  not  spontaneously 
good.  How  deal  with  mere  slackness,  indifference,  the  lazy 
stroke?  No  threat  of  discharge  could  avail;  for  non-employment 
and  work-seeking  are  quite  to  be  done  away  with.  The  men  must 
be  dealt  with  once  for  all  either  as  workers  or  as  delinquents. 

If,  indeed,  labor  were  not  ordinarily  irksome,  and  if  work  were 
always  done  cheerfully  and  spontaneously,  no  difficulties  would 
arise.  We  return  here  to  some  of  the  very  problems  with  which 
we  began.  1  It  may  be  true  that  a  life  without  labor  is  demoraliz- 
ing and  unhappy;  and  it  is  certainly  true  that  a  life  of  inactivitj^ 
is  miserable.  Steady  abor  at  monotonous  tasks,  however,  such  as 
is  essential  for  the  productiveness  of  industrj^  is  evaded  by  almost 
all  men.  In  an  ideal  state,  we  should  wish  to  have  good  work,  good 
pay,  good  leisure;  but  will  men  do  good  work  if  assured  in  any  case 
of  good  pay  and  good  leisu  e?  Spontaneity  in  labor  seems  inconsist- 
ent with  large-scale  operations.  It  is  found  only  when  men  work 
for  themselves,  or  in  groups  where  each  works  for  all  under  the  eyes 
of  all.  The  larger  the  group,  and  the  more  remote  the  connection 
between  each  individual's  labor  and  the  final  output,  the  less  likely 
is  it  that  men  will  work  faithfully  without  some  machinery  of  en- 
forcement and  penalty.  The  problem  is  similar  to  that  universally 
encountered  when  taxation  is  resorted  to  for  defraying  public  ex- 
penses.2  The  services  being  reely  supplied  to  all  thru  taxation 
—  there  being  no  precise  quid  pro  quo  —  all  grudge  the  taxes  that 
must  be  paid  in  order  that  government  shall  be  able  to  supply  the 
services.  Hence  the  mien  of  the  tax-gatherer  is  inevitably  harsh. 
In  a  socialist  state  all  ostensible  workers  would  be  assured  once  for 
all  of  getting  their  share  —  on  whatever  principle  adjusted  —  of  the 
results  of  collective  activity;  and  hence  some  sort  of  pressure  would 
have  to  be  exercised  in  order  to  induce  vigorous  and  effective  work. 
Must  not  the  socialist  taskmaster  be  harsh,  like  our  present  tax- 
gatherer?     And  what  penalties  shall  he  apply? 

We  may  conceive,  indeed,  that  a  socialist  state  shall  undertake 

1  See  Chapter  1,  §§4-6. 

2  Compare  Chapter  68,  §  1. 


488         PROBLEMS  OF  ECONOMIC  ORGANIZATION     [67- §3 

to  adjust  distribution  on  a  basis  of  efficiency,  and  thus  shall  at- 
tempt to  apply  a  spur  to  vigor  by  differences  in  pay  proportioned 
to  zeal  and  to  capacity  as  well;  frankly  accepting  the  wide  range  of 
differences  which  must  result  from  that  principle.  The  greatest 
variations  from  the  average  or  ordinary  rate  would  then  appear, 
of  course,  for  the  case  of  the  comparatively  few  having  great  gifts, 
for  the  great  leaders  and  administrators,  the  men  of  science  and  the 
inventors  —  and  surely,  the  poets  and  artists  likewise.  But  differ- 
ences of  the  same  sort,  tho  less  in  degree,  would  appear  in  the  rank 
and  file  also.  The  interest  of  every  private  employer  now  leads  him 
to  make  distinctions  on  this  basis.  He  selects  for  well-paid  posi- 
tions the  steady,  zealous,  and  intelligent,  and  relegates  the  dull  and 
indifferent  to  tasks  that  can  be  mechanically  measured  —  or  he 
discharges  them  once  for  all.  Is  it  to  be  supposed  that  public 
officials,  having  no  stimulus  from  any  interest  of  their  own,  will 
discriminate  in  such  way  as  to  stir  zeal  and  intelligence,  penalize 
laziness  and  incompetency?  Above  all,  will  the  public  officials  of 
a  democratic  community  do  so? 

Whether  a  man  shall  contribute  more  or  less  to  the  general  out- 
put of  the  community  depends  in  most  cases  on  his  own  spirit  — 
on  his  choice  and  will.  Conspicuous  ability  and  the  temperament 
that  leads  to  its  exercise  present  a  special  problem :  how  to  discover 
the  ability,  how  to  stimulate  it.  For  the  vast  majority  of  men, 
efficiency  in  work  depends  on  striving,  on  self-imposed  habits. 
People  do  not  know  how^  much  they  can  do  until  they  are  com- 
pelled to  try.  The  virtue  of  the  system  of  competition,  of  pri- 
vate interest,  of  self-dependence,  is  that  it  leads  men  to  try  hard. 
No  doubt  it  often  fails.  Among  the  very  poor  it  stunts  endeavor; 
and  there  is  lack  of  opportunity  for  developing  latent  faculties. 
At  the  opposite  extreme,  many  of  those  born  to  riches  waste  valu- 
able powers.  Most  men,  being  dependent  on  themselves  and  pros- 
perous in  proportion  as  they  exert  themselves  productively,  are  led 
automatically  to  do  their  best.  This  great  and  seemingly  indispen- 
sable motive  force  no  socialistic  scheme  can  bring  to  bear  with 
effect. 

§  3.   Similar  questions  arise  as  to  leadership.    All  progress, 


67- §3]  SOCIALISM    {Continued)  489 

material  as  well  as  spiritual,  depends  on  the  selection  of  the  right 
leaders  and  on  spurring  them  to  the  best  exercise  of  their  faculties. 
What  is  the  outlook  for  effective  leadership  under  socialism? 

The  possibilities  seem  to  me  greater  than  some  critics  admit. 
The  essential  thing,  say  the  socialists,  is  to  find  new  and  better  ways 
of  inciting  emulation  and  satisfying  the  love  of  distinction.  What 
men  chiefly  strive  for,  and  above  all  what  men  of  leadership  strive 
for,  is  fame,  place,  and  power.  In  some  degree,  too,  they  are 
prompted  by  the  mere  instinct  for  the  exercise  of  their  gifts. 
Not  the  poet  and  painter  and  musician  only,  but  the  man  of 
science  and  the  administrator  also  are  impelled  by  an  instinct  for 
achievement.  Add  to  this  the  stimulus  of  emulation,  of  wide- 
spread appreciation,  of  conspicuous  distinction,  and  the  sordid  re- 
wards of  present  society  can  be  dispensed  with.  Give  free  play  for 
the  exercise  of  genius  and  power  —  then  the  ribbon  and  the  laurel 
wreath  will  suffice  as  rewards. 

The  psychology  which  underlies  this  train  of  argument  is  surely 
better  than  that  older  one  which  supposed  that  all  men  have  a 
simple  desire  for  wealth.  Other  things  than  riches  and  worldly 
success  appeal  to  the  artist  and  the  man  of  science.  The  leader 
in  business  also  responds  to  other  and  higher  ideals.  Government 
posts  even  now  have  an  attraction  which  goes  far  to  outweigh  the 
higher  pecuniary  rewards  of  private  business.  The  captains  of  in- 
dustry and  fortune  builders  are  actuated  by  very  mixed  motives. 
They  follow  the  traditional  paths  of  emulation,  themselves  but 
dimly  conscious  that  the  wealth  they  pursue  is,  after  all,  but  a  sym- 
bol of  achievement  and  success.  What  stirs  them  more  than  any- 
thing else  is  social  ambition.  Therefore,  say  the  socialists,  the 
essential  thing  is  some  symbol  of  eminence  that  shall  put  its  pos- 
sessor above  the  common  herd  as  conspicuously  as  riches  now  do. 

It  must  be  admitted  that  emulation  and  imitation  underlie  the 
doings  of  industrial  leaders,  as  of  others;  but  it  does  not  follow  that 
the  particular  kinds  of  appreciation  and  recognition  familiar  in  our 
system  of  property  and  inequality  can  be  dispensed  with.  Coarse 
men  need  coarse  stimuli.  How  far  will  the  typical  person  of  busi- 
ness ability  respond  to  other  incentives?     Even  among  persons  of 


490         PROBLEMS  OF  ECONOMIC  ORGANIZATION     [67- §4 

intellectual  and  spiritual  bent,  there  is  a  mixture  of  motives. 
Creature  comforts,  pride  of  place  and  power,  command  of  the 
services  of  others,  are  not  entirely  despised  even  by  poets  and 
philosophers.  As  few  men  are  wholly  selfish  and  few  wholly 
altruistic,  so  few  are  wholly  moved  by  the  higher  or  by  the  lower 
forms  of  the  love  of  distinction.  It  is  not  often  that  the  laurel 
wreath  alone  is  enough  to  satisfy  ambition. 

Much  depends  on  the  growth  of  altruism;  and  this  again  depends 
on  the  spirit  that  pervades  the  community.  The  nobler  and  wider 
feelings  may  be  fostered  or  smothered  in  the  individual  by  the  at- 
mosphere which  siu^rounds  him.  We  may  expect,  with  the  better 
development  of  democracy,  with  the  spread  of  education,  the  ele- 
vation of  character,  the  clearer  understanding  of  social  and  eco- 
nomic problems,  that  the  environment  will  become  more  favorable 
to  emulation  in  service.  A  simpler  way  of  giving  rewards  and  dis- 
tinctions will  prove  effective  in  proportion  as  the  sense  of  common 
interest  is  stronger  in  its  hold  on  all.  But  this  is  a  matter  of  slow 
evolution.  It  is  not  to  be  supposed  that  a  mere  change  in  insti- 
tutions will  at  once  overturn  the  deep-rooted  self-regarding  im- 
pulses or  modify  their  paths  of  action. 

§  4.  Another  problem  is  that  of  selection.  Granted  that  ways 
can  be  found  in  the  socialist  state  to  stimulate  and  reward  the  per- 
sons fit  for  leadership,  how  pick  them  out? 

The  gradations  of  ability,  talent,  and  genius  are  not  recognized 
early  or  measured  with  ease.  Those  who  show  promise  must  go 
thru  a  stage  of  trial.  High  intellectual  capacity,  unlike  bodily 
dexterity,  does  not  appear  at  its  full  until  long  after  adolescence. 
Poets,  musicians,  painters,  scholars,  look  back  with  mingled  curi- 
osity and  amusement  on  the  work  of  their  early  years.  Often  those 
whose  achievements  in  later  life  prove  greatest  could  not  be 
singled  out  in  youth  from  their  competitors.  Men  of  affairs, 
especially,  are  bred  in  the  hard  school  of  experience.  The  more 
promising  are  indeed  readily  picked  out  from  the  rank  and  file. 
To  what  degree  they  are  promising,  and  how  far  they  will  ulti- 
mately advance,  is  not  evident  in  the  early  stages. 

No  community  has  produced  great  poets,  sculptors,  musicians, 


67- §4]  SOCIALISM   {Continued)  491 

except  by  the  emulation  and  competition  of  a  large  body  of  aspi- 
rants. Many  try,  few  succeed.  The  case  is  the  same  with  men 
of  science,  inventors,  business  leaders.  Often  it  is  the  most 
brilliant  of  all,  in  every  field  of  achievement,  who  find  it  hardest 
to  make  their  way;  because  they  are  ahead  of  their  time.  Those 
most  readily  gain  place  and  appreciation  who  have  high  ability 
but  not  the  originality  of  genius  —  the  poets  and  painters  who 
do  that  to  which  the  general  taste  has  already  been  educated,  the 
leaders  in  science  and  industry  who  apply  principles  already  es- 
tablished. On  the  other  hand,  there  are  always  hosts  of  men  who 
undertake  to  break  new  paths,  but  prove  not  to  have  it  in  them. 
The  world  is  full  of  would-be  geniuses  and  crack-brained  schemers. 
Persons  who  are  now  called  on  to  take  the  initiative  in  the  processes 
of  investment,  such  as  bankers,  hardly  pass  a  day  without  having 
new  projects  lu-ged  on  them  —  some  obviously  absurd,  some  doubt- 
ful, a  few  promising.  An  exercise  of  good  judgment  is  necessary 
before  novel  enterprises  can  be  launched  with  promise  of  success; 
and  then  must  follow  a  period  cf  experiment  to  test  the  outcome. 
The  same  holds  good  as  regards  the  selection  of  administrative 
officers,  managers,  heads  of  large  enterprises.  It  does  not  appear 
in  advance  who  has  the  particular  qualities  that  make  an  effective 
leader;  least  of  all,  who  has  those  that  make  a  great  path-breaking 
leader.  . 

By  whom  is  the  process  of  selection  to  be  carried  on  when  there 
is  nothing  analogous  to  the  "natural"  selection  of  present  society? 
The  discouraged  and  rejected  will  then  be  no  longer  free  to  seek 
some  one  else  to  back  their  projects.  They  must  accept  once  for 
all  the  decis  on  of  the  officials  in  charge.  Governments  now  find 
it  hard  enough  to  do  things  in  the  ways  already  approved  by  ex- 
perience, and  to  select  for  their  work  men  whose  qualities  for  lead- 
ership have  already  been  tested  in  private  industry.  How  would 
it  be  if  the  responsibility  for  selection  and  promotion  were  entirely 
in  the  hands  of  officials?  Even  those  public  business  enterprises  in 
which  management  is  now  most  efficient  are  apt  to  be  a  refuge  for 
mediocrity,  or  at  best  for  safe  clinging  to  established  methods. 
Men  of  new  ideas  and  far-reaching  projects  find  no  hearing.     The 


492         PROBLEMS  OF  ECONOMIC  ORGANIZATION     [67- §5 

same  reasons  which  lead  to  the  conclusion  that  in  existing  society 
government  can  advantageously  take  charge  only  of  industries  that 
have  reached  the  stage  of  maturity/  tell  even  more  strongly  against 
the  control  by  government  of  all  industry.  It  is  conceivable  that 
democracy  will  choose  honest  and  efficient  leaders;  even  this  awaits 
the  proof  of  experience.  It  is  well-nigh  impossible  to  conceive  that 
any  governmental  organization,  democratic  or  autocratic,  will  be 
able  to  pick  out  the  men  of  originating  ability.  A  vast  collectivist 
organization  would  hardly  fail  to  be  deadening  to  genius  of  all 
kind.  Would  not  its  selection  of  leaders  be  at  best  a  recognition 
of  ability  to  do  well  what  is  already  well  done? 

§  5.  Considerations  of  a  similar  sort  apply  to  the  development 
of  capital.  The  mere  accumulation  of  capital  in  a  socialist  state  is 
perfectly  feasible,  as  was  noted  in  the  last  chapter;  that  is,  the  set- 
ting aside  and  "saving"  of  a  surplus.  This,  however,  is  only  the 
jBrst  step  in  the  process  by  which  real  capital  is  added  to.  Tools, 
implements,  "capital  goods,"  are  not  saved;  they  are  made.  More 
of  them  and  better  k  nds  can  be  made  only  if  there  is  progress  in  the 
arts.  The  effective  increase  in  the  community's  capital  can  take 
place  only  by  improvement  and  invention. 

In  the  sketches  of  Utopias,  there  is  commonly  reference  to  the 
great  mechanical  improvements  which  will  be  seen  in  the  ideal 
society  —  vast  systematic  plant,  automatic  devices,  supersession 
of  dull  manual  labor  by  ingenious  machines.  The  schemers  speak 
as  if  these  things  came  of  themselves.  In  fact  the  great  mechanical 
advances  have  come  in  the  past  by  slow  steps,  with  experiments 
and  failures;  dependent  on  the  accumulation  of  surplus  means, 
but  not  caused  by  it.  Tho  the  future  is  likely  to  see  tools  perfected 
far  beyond  what  we  now  possess,  all  such  devices  will  come,  as  they 
have  come  in  the  past,  by  trial,  by  selection,  by  evolution.  There 
must  be  not  only  the  means  for  getting  new  capital  made,  but  or- 
ganizers and  inventors.  The  process  of  merely  adding  to  the  num- 
ber of  existing  tools  and  machines  is  easy.  When  once  the  turbine 
engine  and  the  automatic  power  loom  have  been  perfected,  almost 
any  one  can  make  more  of  the  same  kind.    To  improve  the  loom 

1  See  Chapter  64,  §  2. 


67- §6]  SOCIALISM   (Continued)  493 

or  the  turbine  still  further  calls  for  a  very  different  procedure  and 
a  very  different  kind  of  man. 

The  betterment  of  capital  is  thus  closely  interwoven  with  the 
selection  of  capable  leaders.  Both  are  essential  for  continued 
progress.  For  both,  existing  society  offers  the  bait  of  riches.  With 
an  ideally-perfected  community  and  with  ideal  leaders  spontane- 
ously chosen,  all  things  are  indeed  possible.  But  under  a  non- 
competitive organization,  even  in  a  community  far  advanced  in 
intelligence  and  character,  there  would  seem  to  be  but  a  slender 
prospect  for  sustained  material  advance. 

It  may  be  said,  of  course,  that  advance  in  production  is  no 
longer  a  matter  of  the  first  consequence.  Better  distribution  may 
be  thought  the  prime  requisite.  If  the  whole  income  in  civilized 
communities  were  equally  divided  now,  would  not  all  have  enough? 
Possibly;  the  question  is  simply  how  much  suffices.  It  would  prob- 
ably be  a  liberal  estimate  of  the  average  income  of  a  family  in  the 
United  States,  the  most  prosperous  country  on  the  globe,  if  it  were 
stated  at  one  thousand  dollars  a  year.^  When  we  consider  what 
this  means  in  food,  shelter,  clothing,  education,  recreation,  we  can 
hardly  be  content  to  let  it  stand  as  the  last  stage  in  material  prog- 
ress. Surely  it  is  but  the  beginning  of  what  we  may  hope  to  see 
in  the  centuries  to  come.  Those  who  dream  of  the  great  perfections 
to  be  seen  in  the  socialist  state,  of  the  perfected  automatic  machines 
and  the  superabundant  products,  thereby  confess  that  much 
beyond  the  present  stage  of  productiveness  is  desirable.  And  the 
more  "scientific"  socialists,  also,  when  they  speak  of  the  inevit- 
able victory  of  large-scale  production,  of  the  disappearance  of  the 
small  producer  and  the  middle  class,  imply  that  there  is  still  occa- 
sion for  those  advances  in  the  arts  on  which  the  spread  of  large- 
scale  production  depends.  Such  advances,  to  repeat,  do  not  come 
by  any  automatic  process. 

§  6.  The  questions  between  private  property  and  socialism  thus 
reduce  themselves  to  questions  as  to  men's  character,  motives, 

1  This  on  the  basis  of  prices  and  money  incomes  as  they  stood  before  the  war  of 
1914-18.  The  reader  need  hardly  be  reminded  that  in  the  use  of  illustrative  figures 
of  this  kind,  allowance  must  be  made  for  subsequent  changes  in  monetary  conditions. 


494         PROBLEMS  OF  ECONOMIC  ORGANIZATION     [67- §6 

ideals.  They  are  questions,  in  so  far,  of  psychology;  in  more 
familiar  language,  of  human  nature.  They  are  not  simple,  but 
highly  complex;  because  human  nature  is  highly  complex. 

What  is  sometimes  called  "strictly  economic"  reasoning  rests 
on  the  assumption  of  deliberate  intelligent  choice  of  the  procedure 
that  brings  the  most  gain  to  the  individual.  It  assumes  hedonism 
in  its  simplest  form.  Motives  other  than  the  self-regarding  ones 
are  supposed  to  show  themselves  only  in  matters  that  belong  out- 
side the  "economic"  sphere  —  in  the  family  relations,  in  religion, 
in  charity,  perhaps  in  political  action.  Human  nature  is  not  so 
simple  as  this,  nor  so  neatly  divided  into  separate  parts.  Men  are 
not  wholly  selfish  or  wholly  unselfish.  True,  in  most  of  their  deal- 
ings with  strangers  to  the  blood,  they  pursue  their  own  advantage; 
and  it  is  this  fact  which  gives  validity  to  "strictly  economic"  doc- 
trines. But  they  do  not  follow  their  advantage  ruthlessly.  In 
the  future  they  may  follow  it  even  less  ruthlessly  than  they  do  now. 
They  may  be  restrained  not  only  by  the  law,  but  by  a  higher  moral 
sense.  Human  nature  varies  in  this  regard  from  age  to  age,  and 
often  varies  for  the  same  individual  with  his  own  changing  years. 
It  may  improve  so  much  in  the  future  as  to  make  feasible  plans  of 
social  reorganization  which  now  seem  quite  Utopian. 

So  it  is  with  the  impulses  of  emulation  and  distinction.  In  the 
past  they  have  turned  usually  to  some  form  of  domination,  in  ac- 
cord with  that  instinct  of  struggle  and  conquest  which  we  have  in- 
herited from  savage  ancestors.  Power  over  others  has  been  the 
keynote  of  political  and  economic  history.  It  was  at  the  base  of 
the  feudal  system.  It  affects  enormously,  tho  half  unconsciously, 
the  struggle  for  wealth  in  modern  society,  whose  ways  of  emu- 
lation are  still  much  under  the  influence  of  the  feudal  traditions. 
The  love  of  distinction  is  so  universal  and  so  rooted  that  it  cannot 
be  eradicated.  But  it  can  conceivably  be  turned  into  directions 
which,  while  still  satisfying  the  ineradicable  impulse,  will  lead  to 
a  wider  spread  of  the  elements  of  happiness.  A  spirit  of  service 
may  replace  the  spirit  of  domination,  and  emulation  may  be  for  the 
greatest  promotion  of  the  common  good,  not  of  individual  interest. 

We  are  much  better  men  than  our  savage  ancestors;  more  altru- 


67- §6]  SOCIALISM   (Continued)  495 

istic,  on  the  whole,  as  well  as  more  intelligent.  Of  this  general 
betterment  the  last  hundred  years  have  supplied  many  illustrations. 
Suffering  will  not  be  endured  as  it  was  in  former  times;  the  mere 
description  and  exposure  of  it  means  that  something  will  be  done  to 
stop  it.  The  abolition  of  cruel  punishments  is  a  phenomenon  of  large 
significance.  The  steady  development  of  social  legislation,  and  the 
increase  of  charitable  and  educational  endowments,  are  other  results 
of  the  sense  of  common  interest,  of  the  growing  altruistic  impulse. 

From  this  point  of  view,  it  may  be  said  that  all  the  great  social 
movements  of  modern  times  rest  on  the  same  basis,  and  that  all 
tend  away  from  individualism  and  in  the  direction  of  socialism. 
Tho  important  distinctions  exist,  as  has  just  been  noted,^  between 
full-fledged  socialism  and  public  management  of  selected  indus- 
tries, it  may  none  the  less  be  maintained  that  the  movement  for 
public  management  and  control  rests  on  the  spread  of  a  more  al- 
truistic spirit.  And  the  substitution  of  public  for  private  manage- 
ment is  not  only  impelled  by  this  higher  social  spirit,  but  depends 
for  its  eventual  success  on  a  high  level  of  character  and  intelligence. 
Of  labor  legislation,  also,  it  is  to  be  said  that  it  is  both  impelled  by 
the  spread  of  better  ideals  in  the  community  at  large,  and  depend- 
ent for  its  ultimate  good  results  on  betterment  of  character  among 
the  laborers  themselves.  Thus  the  differences  in  spirit,  in  method, 
in  limiting  conditions,  between  socialism  and  other  movements 
for  reform,  may  be  said  to  be  only  in  degree. 

But  the  differences  in  degree  remain  vast;  and  such  radical  trans- 
formations in  human  nature  and  in  human  institutions  as  the  so- 
cialists expect  are  not  to  be  looked  for  within  any  stretch  of  time 
that  concerns  present  generations.  How  far  changes  in  men's 
motives  and  ideals,  and  so  in  their  public  and  private  relations, 
will  ultimately  go,  it  would  be  rash  to  predict.  But  it  is  certain 
that  they  will  proceed  very  slowly.  For  long  ages  men  will  remain 
very  much  as  thej'  now  are,  responsive  in  some  degree  to  the  higher 
and  larger  impulses,  yet  in  most  of  their  dealings  with  each  other 
acting  mainly  under  the  sway  of  those  lower  and  narrower.  They 
will  need  to  be  spurred  to  vigor,  to  the  full  exercise  of  their  powers, 

J  See  Chapter  66,  §  5. 


496         PROBLEMS  OF  ECONOMIC  ORGANIZATION     [67- §6 

to  self-restraint,  by  their  own  needs  and  interests  and  by  the  selfish 
altruism  of  the  family  affections.  So  long  as  this  is  the  case,  the 
system  of  dependence  on  one's  own  exertions,  of  bargaining  between 
individuals,  of  private  accumulation  and  private  ownership,  will 
persist. 

It  may  be  suspected  that  the  divergence  of  opinion  on  the  pos- 
sibilities and  ideals  of  socialism  often  hinges  on  differences  between 
the  disputants  in  character  and  temperament.  Persons  of  highly 
altruistic  character  easily  believe  that  others  will  respond  to  the 
motives  that  actuate  themselves.  Those,  again,  who  are  most 
happy  when  engaged  in  useful  labor,  even  tho  it  be  sustained  and 
monotonous,  believe  that  others  will  cheerfully  work,  as  they  do, 
with  little  regard  to  the  rate  of  remuneration.  So  it  is  with  the 
ideals  of  life  and  the  ultimate  sources  of  happiness.  To  some  op- 
ponents of  socialism,  its  program  is  unattractive  because  it  offers 
a  world  without  strife  —  as  tame  as  a  sport  without  danger.  To 
them,  peaceful  emulation,  and  competition  solely  to  serve  the  com- 
mon good,  are  things  flat  and  stale.  They  see  no  zest  in  life  with- 
out the  prospect  of  victory  and  therefore  the  possibility  of  defeat. 
And  so  it  is  as  regards  that  stereotyping  of  life  which  would  seem  to 
be,  in  some  degree  at  least,  inevitable  in  a  socialist  state.  The 
advocates  of  individualism  say:  let  men  ruin  themselves,  if  they 
will,  and  bring  ruin  on  those  nearest  and  dearest  to  them ;  can  they 
rise  to  heights  of  happiness  and  perfection,  of  full  development  of 
personality,  unless  they  have  a  choice  of  shaping  their  careers  to 
the  sweet  or  bitter  end?  Persons  of  a  placid  temperament,  on  the 
other  hand,  are  attracted  by  peace,  security,  mutual  help,  assured 
comfort;  a  world  with  no  glittering  prizes  and  no  abject  failures. 
Freedom  means  different  things  to  different  people.  To  some, 
it  promises  nothing  unless  it  be  the  chance  to  compete,  and  to  win 
and  to  reap  the  fruits  of  winning.  To  others  it  means  escape  from 
pain,  from  the  need  of  holding  one's  own  against  superior  competi- 
tors, from  the  subjecton  of  defeat.  Such  differences  in  tempera- 
ment can  be  brought  into  accord  by  no  reasoning.  Hence  the  de- 
bate on  the  merits  and  attractions  of  private  property  and  socialism 
may  be  expected  to  go  on  indefinitely. 


67- §7]  SOCIALISM   (Continued)  497 

§  7.  In  the  preceding  pages,  no  far  look  into  the  future  has  been 
essayed.  Only  for  the  next  few  generations  can  we  venture  on 
some  predictions.  Public  ownership  will  spread,  tho  how  far  we 
cannot  be  sure.  The  plane  of  competition  will  be  raised;  the  in- 
stitutions of  property  and  inheritance  will  be  narrowed  in  scope. 
For  the  immediate  future  we  see  some  reforms  clearly  called  for, 
others  awaiting  inquiry  and  trial.  But  what  of  the  final  outcome? 
Will  the  evolution  of  society  eventually  proceed  to  the  socialist 
state? 

The  so-called  materialistic  interpretation  of  history,  as  worked 
out  by  Marx  and  adopted  by  others  of  more  or  less  socialist  drift, 
tries  to  give  an  explicit  answer.  The  future  will  inevitably  bring 
the  disappearance  of  private  ownership  in  instruments  of  produc- 
tion and  the  elimination  of  the  property-owning  and  income- 
receiving  class.  Stripped  of  its  inessentials,  the  prediction  is 
simple  enough.  Large-scale  production  will  spread  further  and 
further;  the  small  producer  and  the  middle-sized  will  disappear; 
there  will  remain  only  a  few  great  capitalists  and  a  propertyless  pro- 
letariat; the  masses  will  become  more  intelligent  and  conscious  of 
their  power;  the  capitalists  will  then  be  dispossessed  (possibly  but 
not  necessarily  by  bloody  revolution)  and  the  fully  organized  so- 
cialist state  will  emerge. 

One  thing  is  tolerably  certain:  the  overturn  is  not  imminent. 
At  the  time  of  the  revolution  of  1848,  Marx  thought  that  the  final 
stage  in  this  industrial  evolution  was  setting  in.  The  first  stage, 
long  extended,  had  been  that  of  the  direct  exploitation  of  the  la- 
borer thru  slavery  and  serfdom.  During  the  second  stage,  last- 
ing from  the  beginning  of  the  industrial  revolution  in  the  eighteenth 
century  to  the  middle  of  the  nineteenth  century,  the  property- 
owning  class  had  exploited  the  free  laborer.  The  third  and  last 
stage,  that  o'  the  emancipation  of  the  laborer  thru  dispossession 
of  the  capitalist,  was  supposed  to  be  ushered  in  by  the  revolution 
of  1848.  But  of  this  prediction  as  little  has  been  fulfilled  as  of  the 
confident  expectation  then  cherished  by  others  that  an  era  of  uni- 
versal democratic  government  was  setting  in.  The  uprising  of 
1848  subsided,  with  few  immediate  changes  in  political  or  social 


498         PROBLEMS  OF  ECONOMIC  ORGANIZATION     [67- §7 

structure.  Its  lasting  effects,  fused  with  those  of  other  move- 
ments, came  about  by  s  ow  and  gradual  changes.  Society  has  been 
much  altered  in  the  last  fifty  years,  but  it  has  not  been  revolution- 
ized. 

The  socialists  themselves  are  coming  to  recognize  the  inevitable- 
ness  of  gradual  change.  A  curious  controversy  is  going  on  in  Ger- 
many within  the  socialist  ranks,  between  those  who  hold  to  the 
strict  Marxian  doctrine  of  impending  revolution  and  early  dispos- 
session, and  those  who,  maintaining  that  changes  will  be  slow, 
advocate  a  policy  of  opportunism.  Marx's  Caintal  has  been  a  sort 
of  bible  in  the  German  socialist  camp.  Tho  the  book  contains, 
with  evidence  of  extraordinary  intellectual  ability,  much  obviously 
untenable  matter,  the  loyal  socialists  are  unwilling  to  give  up  any 
of  its  teachings.  Yet  the  proof  is  brought,  by  socialists  no  less 
convinced  than  was  the  leader,  that  his  predictions  as  to  economic 
evolution  are  wrong.  The  middle  class  is  not  disappearing.  The 
number  of  the  rich  grows,  but  the  number  of  the  moderately  well- 
to-do  grows  also.  Great  establishments  increase,  but  vast-scale 
production  does  not  cover  the  whole  industrial  field,  and  there  is  as 
yet  no  indication  that  it  will.^  Democracy  extends,  and  the  trade- 
union  movement  grows.  But  there  is  little  sign  of  an  impending 
class  war,  or  of  a  resolute  and  conscious  adoption  of  the  socialist 
principles  by  organized  workingmen. 

It  is  true  that  changes  are  likely  to  proceed  more  quickly  in  the 
future  than  they  have  done  in  the  past.  The  spread  of  education, 
the  ease  of  communication,  the  enormous  facilities  for  propaganda 
thru  cheap  printing,  make  public  opinion  more  mobile.  The 
inertia  of  settled  habits  is  less.  Moreover,  the  last  fifty  years  have 
seen  wonderful  changes  in  industrial  organization  as  well  as  in  the 
mechanic  arts;  the  next  fifty  years  may  see  changes  as  great  The 
consolidation  of  industry  will  probably  become  accentuated,  and 
public  ownership  will  almost  surely  spread.  The  twentieth  cen- 
tury before  its  close  is  likely  to  see  developments  that  would  seem 

1  Compare  the  figures  already  given  in  Chapter  55,  §§  1-3,  and  in  Chapter  4, 
§  1.  See  also  Bernstein's  Evolutionary  Socialism,  English  translation,  p.  57.  Bern- 
stein is  one  of  the  best  known  among  the  non-orthodox  German  socialists,  an  able 
and  high-minded  writer. 


67- §7]  SOCIALISM   {Continued)  499 

unthinkable  to  the  staid  American  business  man  of  our  own 
time. 

Nevertheless,  the  fundamental  social  institutions  will  not  be 
quickly  revolutionized.  As  compared  with  such  an  overturn  as 
the  uncompromising  socialist  would  bring  about,  the  most  radical 
changes  now  in  prospect  will  leave  the  face  of  society  very  much 
the  same.  The  Australian  colonies  now  have  public  ownership  of 
railways  and  other  great  enterprises;  they  have  compulsory  arbi- 
tration and  minimum  wages;  they  have  progressive  taxation  and 
the  like.  But  they  have  competition  and  money-making,  social 
classes  and  pecuniary  ambition,  marked  inequalities  in  property 
and  income,  idle  rich  and  overworked  poor.  The  traveler  who 
journeys  there  finds  a  state  of  things  not  essentially  different  from 
that  in  the  United  States,  where  the  individualistic  traditions 
retain  their  hold  so  much  more  tenaciously.  Society  can  go  a  long 
way  in  overhauling  present  institutions  without  approaching  the 
socialist  goal. 

The  reason  why  the  process  of  social  evolution  is  slow  is  that 
men  themselves  change  slowly.  Not  only  human  nature  and 
human  motives,  but  the  current  standards  of  right  and  wrong, 
the  beliefs  as  to  what  constitutes  right  government,  right  owner- 
ship of  goods,  right  relations  between  men  and  between  men  and 
women  —  these  foundations  of  society  are  extraordinarily  stable. 
Even  when  shaken  by  a  great  upheaval  like  the  French  Revolution, 
they  prove  in  a  short  time  to  have  been  little  disturbed.  They  are 
maintained  from  generation  to  generation  by  the  unseen  but  per- 
vasive influence  of  example  and  imitation.  The  slowness  with 
which  education  works  out  results  on  any  large  scale  illustrates  the 
difficulty  of  changing  habits  of  thought  and  conduct  among  masses 
of  men.  Better  education  is  rightly  deemed  the  greatest  of  social 
solvents;  but  it  is  hard  to  bring  a  real  influence  to  bear  on  the  mil- 
lions who  are  to  be  affected.  The  educational  leaders  tell  us  that 
the  things  to  be  aimed  at  are  clear  thinking,  accurate  observation, 
training  in  the  Independent  use  of  the  faculties  —  above  all,  con- 
science and  character.  Yet  even  the  greatest  educational  advances 
go  but  a  little  way  toward  attaining  these  elusive  ends.    How  slow 


500         PROBLEMS  OF  ECONOMIC  ORGANIZATION     [67- §  7 

is  the  improvement  in  methods  of  education,  how  much  slower  the 
influence  on  the  character  and  the  daily  life  of  the  individual! 

The  question  none  the  less  persists,  whether  there  is  not  a  goal 
for  the  development  of  society.  Tho  one  may  be  convinced  that 
the  full-grown  socialist  state  is  not  to  come  in  any  visible  future, 
may  it  not  come  in  the  end?  I  cannot  believe,  for  myself,  that  it 
is  possible  to  foresee  what  the  distant  future  will  bring.  Consider 
what  was  the  state  of  civilized  society  some  four  hundred  years 
ago,  at  the  culmination  of  the  Renaissance  and  the  first  stages  of 
the  Protestant  Reformation :  who  could  then  imagine  what  devel- 
opment would  take  place  in  the  coming  centuries,  what  political, 
social,  intellectual,  industrial  changes  would  occur?  No  less  im- 
possible is  it  for  us  to  conceive  what  will  be  the  changes  in  the  cen- 
turies that  lie  before  us.  The  system  of  private  property,  if  it 
maintains  itself,  is  indeed  likely  to  be  very  different  from  what  it 
is  now;  but  whether  it  will  remain  unchanged  in  essentials,  or  will 
be  gradually  stripped  of  many  features  now  deemed  essential,  or 
transformed  at  last  into  something  like  the  socialist  state  —  all 
this  we  cannot  foretell. 

The  impossibility  of  seeing  far  into  the  future  is  admitted  by 
the  less  fanatical  among  the  socialists  themselves.  The  abolition 
of  great  extremes  in  income,  a  wide  guarantee  of  decent  comfort, 
the  disappearance  of  a  leisure  class,  the  assumption  by  the  state 
of  the  overshadowing  great-scale  industries,  the  control  of  all  nat- 
ural resources  —  these,  indeed,  seem  to  be  essential  points  in  their 
program.  Just  how  far  gradations  of  income  may  be  allowed  to 
remain,  how  far  individual  ownership  of  property  may  persist,  what 
play  may  be  allowed  for  some  sorts  of  competitive  industry,  are 
matters  on  which  their  program  is  unsettled.  Each  is  entitled  to 
construct  his  own  utopia.  With  this  haziness  about  the  ultimate 
goal,  many  socialists  accept  a  tentative  and  sometimes  wavering 
procedure.  The  revolutionary  wing  is  less  dominant,  opportunism 
more  widely  accepted.  All  sorts  of  changes  in  present  society  are 
welcomed,  so  long  as  their  general  drift  is  in  accord  with  the  col- 
lect! vist  ideal;  such  as  workmen's  insurance  and  labor  legislation, 
state  ownership  and  control  even  within  a  narrow  range.     Cooper- 


67- §7]  SOCIALISM   {Continued)  501 

ation  and  trade  unions  among  workmen  are  no  less  welcome,  even 
tho  the  scope  of  these  movements  be  strictly  within  the  system  of 
private  property;  since  they  are  the  means  of  educating  the  mem- 
bers and  training  them  in  habits  of  common  action. 

It  is  fortunate  that  men  of  all  shades  of  opinion  can  work  to- 
gether in  the  reforms  that  are  called  for  in  the  visible  future.  The 
ultimate  outcome  may  be  allowed  to  ake  its  own  course.  Little 
that  we  now  do  can  have  much  effect  in  shaping  it.  The  discus- 
sion of  socialism  is  by  no  means  barren.  It  centers  attention  on 
the  fundamental  problems  of  society,  on  the  basis  of  existing  insti- 
tutions, on  the  sources  from  which  coming  growths  must  proceed. 
It  points  to  a  goal  that  has  had  charm  for  some  of  the  noblest  of 
men.  It  deserves  the  respect  even  of  those  to  whom  the  goal  is 
not  attractive  or  to  whom  it  seems  quite  unattainable.  But  it 
affects  in  no  serious  degree  present  endeavors  and  aspirations.  As 
to  these,  there  is  a  noteworthy  accord  of  opinion.  The  course 
which  society  should  take  for  the  next  generation  or  two  is  not  ob- 
scure, and  all  men,  socialists  as  well  as  social  agnostics,  can  join 
in  efforts  to  turn  it  to  the  direction  admitted  by  almost  all  to  be 
that  of  progress. 

References  on  Book  VII 

W.  Z.  Ripley,  Railroads:  Rates  and  Regulation  (1912)  and  Railroads: 
Finance  and  Organization  (1915),  gives  a  wealth  of  information  on  Ameri- 
can conditions.  W.  M.  Acworth,  The  Elements  of  Railway  Economics 
(1905),  and  E.  R.  Johnson,  American  Railway  Transportation  (new  ed., 
1910) ;  the  latter  chiefly  descriptive  and  written  primarily  as  a  textbook 
for  American  colleges.  On  the  American  situation  as  it  stands  in  1921, 
l.'L.t^h.arf man,  The  American  Railroad  Problem  (1921).  Among  foreign 
books,  C.  Colson,  Transports  et  Tarijs  (1908),  technical  and  detailed,  is  of 
high  value. 

On  combinations  and  trusts,  A.  Marshall,  Industry  and  Trade,  Book  III 
(1919),  analyzes  admirably  the  course  of  development  in  England,  the 
United  States  and  Germany.  R.  Liefmann,  Kartelle  und  Trusts  (1909), 
gives  a  compact  account  of  the  German  situation  as  it  then  was;  and  H. 
W.  Macrosty,  The  Trust  Movement  in  British  Industry  (1907),  a  detailed 
survey  of  that  in  Great  Britain.  Books  dealing  especially  ^\'ith  American 
conditions  are  R.  T.  Ely,  Monopolies  and  Trusts  (1900);  J.  W.  Jenks,  The 


502         PROBLEMS  OF  ECONOMIC  ORGANIZATION     [67- §7 

Trust  Problem  (1900) ;  E.  S.  Meade,  Trust  Finance  (1903) ;  L.  H.  Haney, 
Business  Organization  and  Combination  (1914);  E.  D.  Durand,  The  Trust 
Problem  (1915). 

On  public  ownership,  L.  Darwin,  Municipal  Trade  (1903),  is  an  acute 
critical  book,  by  an  opponent;  a  briefer  statement  of  the  same  reasoning 
is  in  this  author's  Municipal  Ownership  (1907).  S.  0.  Dunn,  Government 
Ownership  of  Railways  (1913),  gives  effectively  the  arguments  against. 
A  convenient  summary  is  in  a  series  of  papers,  The  State  in  Relation  to 
Railways,  pubhshed  by  the  Royal  Economic  Society  (1912).  A  mass  of 
information  and  discussion  on  both  sides  is  in  the  Report  on  the  Municipal 
and  Private  Operation  of  Public  Utilities,  Published  by  the  National  Civic 
Federation  (3  vols.,  1907).  A  detailed  treatment  of  the  relation  of  muni- 
cipalities to  "pubUc  utilities"  is  in  D.  F.  Wilcox,  Municipal  Franchises 
(2  vols.,  1910-1911). 

The  books  on  socialism  deal  largely  with  controversies  which  do  not  pro- 
ceed to  the  heart  of  the  matter.  This  seems  to  me  to  hold  of  K.  Marx,  Das 
Kapital  (English  translation,  1891),  the  most  famous  and  influential  of 
socialist  books.  Among  the  innumerable  discussions  and  refutations  of 
the  Marxian  doctrines  may  be  mentioned  E.  Bohm-Bawerk,  Marx  and  the 
Close  of  his  System  (English  translation,  1891),  J.  E.  Le  Rossignol,  Ortho- 
dox Socialism:  a  Criticism  (1907).  A  concise  and  vigorous  statement, 
based  mainly  on  Marx,  is  in  K.  Kautsky,  The  Class  Struggle  and  The  Social 
Revolution  (Enghsh  translations,  1910).  J.  Spargo,  Socialism  (1906),  is 
another  popular  statement  of  Marxian  tenets  and  proposals.  G.  D.  H. 
Cole,  Guild  Socialism  Re-stated  (1920),  summarizes  the  arguments  for  that 
proposal.  S.  and  B.  Webb,  A  Constitution  for  the  Socialist  Commonwealth 
of  Great  Britain  (1920),  grapples  with  the  problems  of  poHtical  organiza- 
tion which  a  socialist  program  involves. 

Among  expository  and  critical  books,  A.  Schaeffle,  The  Impossibility  of 
Social  Democracy,  and  The  Quintessence  of  Socialism  (English  translations, 
1892  and  1902),  are  good,  especially  the  last  named.  Cp.  0.  D.  Skelton, 
Socialism,  a  critical  Analysis  (1911).  An  admirable  historical  and  critical 
sketch  (on  the  wider  relations  of  socialism,  as  indicated  by  the  title)  is  W. 
Sombart,  Sozialismus  und  Soziale  Bewegung  im  19  Jahrhundert  (English 
translation,  1909).  A  compact  discussion  of  the  Hterature  on  sociahsm 
thru  the  nineteenth  century,  and  of  the  Social  Democratic  party  in  Ger- 
many, is  in  H.  Herkner,  Die  Arbeiterfrage  (7th  ed.,  1921).  The  most 
stimulating  and  discriminating  advocacy  and  discussion  of  sociahsm  is 
often  by  writers  who  do  not  pretend  to  be  "scientific."  Such  are  H.  G. 
Wells,  A  Modern  Utopia  (1905),  and  New  Worlds  for  Old  (1908),  and  G. 
Lowes  Dickinson,  Justice  and  Liberty, 


BOOK  VIII 

TAXATION 


,  CHAPTER  68 

Principles  Underlying  Taxation 

Section  1.  The  essential  nature  of  taxation:  no  quid  pro  quo.  Taxes  a  sign 
of  wider  consciousness  of  common  interest,  505  —  Sec.  2.  Proportional 
or  progressive  taxation?  This  question  of  justice  inextricably  connected 
with  the  general  question  of  social  justice  and  the  righteousness  of  inequal- 
ities in  wealth.  "Ability"  and  "equality  of  sacrifice"  are  inconclusive 
principles,  507  —  Sec.  3.  Should  property  incomes  be  taxed  at  higher 
rates  than  those  from  labor?  512  —  Sec.  4.  Can  taxes  be  made  higher 
according  to  the  source  or  nature  of  the  income?  513  —  Sec.  5.  Pro- 
gressive taxation  of  interest  from  capital,  on  the  principle  of  taxing  saver's 
rent,  516. 

§  1.  The  essence  of  a  tax,  as  distinguished  from  other  charges 
by  government,  is  the  absence  of  a  direct  quid  pro  quo  between 
the  taxpayer  and  the  pubHc  authority.  It  follows  that  a  tax 
is  necessarily  a  compulsory  levy.  The  post  office  illustrates  the 
payments  which  are  different  from  taxes.  A  charge  is  made  by 
it  for  each  letter;  no  one  is  compelled  to  contribute  toward  its 
revenue  unless  he  makes  use  of  its  service.  The  revenue  from 
postage  stamps  in  almost  all  countries  roughly  equals  the  expenses 
of  conducting  the  business,  and  each  individual  user  pays  (again 
with  a  rough  approximation)  in  proportion  to  the  service  which  he 
gets.  The  same  situation  exists  when  a  government  manages  the 
telegraph  or  the  rai'way  But  when  it  maintains  streets,  afire 
department,  a  police  force,  it  supplies  the  several  services  free  to 
every  one.  On  the  other  hand  every  one  is  called  on  to  contribute. 
It  is  immaterial  whether  the  individual  citizen  happens  to  be 
benefited  directly  or  indirectly;  a  great  deal,  a  little,  or  not  at  all. 
f  What  he  pays  to  the  government  for  a  postage  stamp,  for  a  rail- 
I  way  ticket,  for  a  supply  of  water,  is  in  the  nature  of  a  price  for  a 
'^  specific  service.  It  is  very  different  from  a  tax,  which  is  exacted 
from  all  alike  and  without  any  regard  to  the  individual's  use  of 
the  services  supplied. 

505 


506  TAXATION  [C.8-§1 

This  severance  of  payment  from  service  is  sometimes  inevi- 
table. To  tell  how  much  any  individual  is  benefited  bj^  the 
maintenance  of  order  thru  a  police  force  is  impossible.  The  only 
way  to  support  the  force  is  to  cal  upon  every  one  to  contribute, 
in  some  proportion  deemed  equitable.  The  same  is  true  of  a 
military  force,  whether  r  garded  as  a  sort  of  enlarged  police  or  as 
an  instrument  for  national  advancement  in  other  ways.  The 
benefits  from  the  maintenance  of  sanitary  service  are  also  un- 
apportionable.  As  regards  fire-fighting  apparatus,  it  is  conceiv- 
able that  division  of  the  expense  should  be  made  among  different 
owners  of  inflammable  property  on  some  well-defined  principle  of 
insurance  premium  But  it  is  obvious  that  the  whole  community 
is  vitally  interested  in  preventing  conflagrations,  and  the  support 
of  this  public  service  also  takes  place  by  the  levy  of  taxes  which 
disregard  any  question  of  special  benefit. 

In  other  cases,  increasing  in  number  as  civilization  progresses, 
the  use  of  taxes  instead  of  prices  is  not  inevitable^  being  the  result 
simply  of  a  growing  conviction  of  the  wide  usefulness  of  the  service. 
Highways,  beyond  the  confines  of  cities  or  thickly  settled  spots, 
were  in  former  times  often  managed  on  the  toll  principle;  so  were 
bridges.  Those  alone  paid  for  them  who  u;.ed  them,  and  paid 
according  to  the  extent  of  the  use.  Their  construction  and  main- 
tenance were  likely  to  be  left  in  the  hands  of  private  persons,  to 
be  managed  like  any  other  business  x\s  the  conviction  spread 
that  freedom  of  movement  was  of  general  advantage,  tolls  were 
abolished  on  roads  and  bridges  and  these  means  of  communication 
were  supported  by  taxes  The  most  striking  illustration  of  the 
movement  of  opinion  in  this  direction  is  found  in  the  modern  atti- 
tude toward  education.  It  is  entirely  feasible  to  conduct  education 
as  a  private  industry,  or  to  manage  it,  if  public,  on  a  principle  of 
payment  in  proportion  to  the  expense  incurred.  All  civilized 
peoples,  however,  believe  it  to  be  of  vital  importance  that  educa- 
tion should  be  supplied  to  all,  and  should  be  supplied  in  such  way 
as  to  uplift  and  advance  the  community  at  large,  not  on  any  basis  of" 
proportional  payment.  No  doubt,  a  motive  even  more  distinctly 
altruistic  enters  —  a  desire  to  equalize  opportunities,  to  make  the 


68- §2]         PRINCIPLES  UNDERLYING  TAXATION  507 

way  easier  for  the  great  masses  of  the  poor,  to  mitigate  inequahties 
in  possessions  and  income.  Under  the  influence  of  these  converg- 
ing motives,  education  is  made  free;  not  only  elementary  educa- 
tion, but  in  more  or  less  degree  higher  education  as  well  A  great 
range  of  government  activity  illustrates  the  growing  conscious- 
ness of  common  interest  and  the  growing  influence  of  sympathy 
and  altruism  —  libraries,  museums,  parks,  hospitals.  It  has 
been  aptly  said  that  the  growth  of  those  services  which  are  sup- 
ported by  taxation  measures  a  people's  consciousness  of  common] 
interest  —  nay,  its  very  progress  toward  higher  civilization. 

Taxation  necessaril}'  involves  compulsory  levy.  Tho  people 
may  be  unanimous  in  the  belief  that  it  is  in  the  common  interest 
for  a  given  set  of  services  to  be  undertaken  gratuitously  for  all, 
the  support  of  the  services  by  voluntary  contributions  is  quite 
out  of  the  question.  There  have  been  occasions,  in  times  of 
great  national  peril  and  of  fervently  aroused  public  spirit,  when 
voluntary  contributions  have  been  an  appreciable  financial  re- 
source; but  they  hstve  been  rare  and  short-lived.  Even  in  the 
most  imminent  danger,  a  steady  and  considerable  revenue  can 
be  got  only  by  compulsion.  Hence  the  mien  of  the  tax-gatherer  is, 
as  stern  under  a  self-governing  democracy  as  under  the  most  abso- 
lute despotism.  Men's  willingness  to  support  public  service  does 
not  grow  apace  with  their  conviction  of  the  need  of  public  service. 
§  2.  The  fh'st  question  of  principle  in  taxation  has  to  do,  there- 
fore, with  the  mode  of  apportionment.  In  what  manner  deter- 
mine how  much  the  individual  shall  contribute  toward  defraying 
the  various  public  services  rendered  gratuitously?  Shall  he  pay 
simply  in  proportion  to  his  income,  or  more  than  in  proportion? 
On  this  question  there  are  two  fundamentally  different  answers, 
the  one  more  conservative,  the  other  more  radical;  the  one  main- 
staining  the  principle  of  proportion,  the  other  that  of  progression. 
'-  The_conserya.tive  opinion,  maintaining  the  principle  of  pro- 
portion, is  very  simple.  It  proposes  to  call  upon  each  person 
to  pay  in  proportion  to  his  income,~and  so  to  lieave  the  relations 
between  different  incomes  undisturbed.  Let  the  rich  pay  more 
in  the  degree  to  which  their  incomes  are  larger,  but  in  that  degree 


508  yy>^  TAXATION  [68- §2 


only.  The  essential  basis  for  this  view  Is  that  the  existing  distri- 
bution of  wealth  should  not  be  disturbed.  True,  some  people  are 
more  prosperous  than  others;  some  are  rich,  others  are  poor.  But 
these  differences  are  regarded  as  defensible  —  nay,  in  the  un- 
qualified support  of  the  existing  social  order  are  thought  to  be  in 
accord  with  the  maxims  of  ideal  justice.  Since  taxes  must  be 
levied,  and  since  it  is  hopeless  to  measure  either  the  cost  of  the 
public  services  rendered  to  any  individual,  or  the  benefits  to  him 
of  the  services,  let  all  be  treated  alike,  and  let  all  be  called  on  to 
contribute  the  same  proportion  of  income.  The  social  system 
thus  remains  undisturbed  by  the  tax  levy;  it  was  equitable  before, 
and  it  remains  so. 

A  somewhat  different  view,  but  one  leading  to  the  same  result, 
is  that  the  existing  distribution  of  property  and  income  should 
not  be  disturbed  hy  taxation.  If  it  is  to  be  disturbed,  let  other 
machinery  for  doing  so  be  adopted.  This  view  implies  neither 
approval  nor  disapproval  of  the  gulf  between  rich  and  poor,  merely 
Indifference  or  aloofness.  The  taxg^herer,  it  is  said,  should  not 
be  distracted  by  having  to  consider  such  large  and  difficult  social 
questions.  His  task,  even  in  its  simplest  form,  is  troublesome 
enough:  to  devise  ways  of  securing  the  needed  revenue  without 
arousing  discontent  beyond  endurance.  This  may  be  described 
as  the  simply  fiscal  principle  of  taxation:  according  to  which 
taxation  should  concern  itself  solely  with  the  problem  of  raising 
the  money  for  public  expenses.  It  leads,  like  the  view  first  de- 
scribed, to  proportional  levy  and  to  the  rejection  of  progression. . 

Still  another  ''  fiscal )'  principle  of  taxation  may  be  noted ;  one 
that  perhaps  should  be  called  the  cynical  principle.  According 
to  this,  the  essential  task  for  the  legislator  is  to  get  the  revenue 
in  such  way  as  to  cause  the  minimum  of  vexation  and  opposition.^ 
Any  tax  is  good  which  brings  in  a  large  net  revenue  without  pausing 
much  protest  from  the  payers,  or  at  least  from  those  payers  who 
have  political  influence.  If  in  a  democratic  community  high 
progressive  taxes  on  the  rich  bring  in  substantial  returns,  without 
trouble  in  administration  and  without  causing  many  voters  to 
revolt,  let  them  be  imposed.    And  on  the  other  hand,  if  taxes  on  an 


68- §2]         PRINCIPLES  UNDERLYING  TAXATION  509 

article  consumed  in  great  quantities,  such  as  sugar  or  coffee, 
promise  a  large  re\enue,  and  can  be  levied  by  a  hoodwinking 
process  which  prevents  the  masses  from  realizing  the  burden,  let 
them  too  be  imposed.  "  Pluck  the  goose  with  as  little  squawking  as 
possible."  This  cynical  view  is  hardly  e.ver  advocated  in  so  many 
words;  but  a  great  deal  of  legislation  rests  upon  it.  Every  finance 
minister  has  constantly  to  face  demands  for  additional  revenue, 
and  also  opposition  from  those  whom  he  proposes  to  tax.  The 
temptation  is  well-nigh  irresistible  to  follow  the  path  of  least  re- 

^^ sistance.     The  very  great  part  which  indirect  taxes  on  commodities 

play  in  the  finances  of  all  modern  countries  is  explicable  chiefly 
on  this  ground. 

The  question  of  justice  in  taxation  is  at  least  ostensibly  kept 
in  mind  in  most  discussions.  A  consciousness  of  it  underlies  the 
trains  of  reasoning,  favoring  strict  proportion,  w^hich  have  just 
been  stated  —  both  that  which  affirms  the  distribution  of  wealth 
to  be  now  just,  and  therefore  rightly  to  be  left  undisturbed  by 
taxation,  and  that  which  simply  would  keep  taxation  disentangled 
from  questions  of  social  reform.  Both  of  these  opinions  have  the 
merit  of  facing  squarely  a  truth  which  many  writers  on  this  much- 
debated  topic  have  failed  to  face;  namely,  that  the  question  of 
equity  in  taxation  cannot  be  discussed  independently  of  the  equity 

p^of  the  whole  existing  social  order. 

^y-    Tlie -Cojurageous  advocates  of  progression  base  their  views  pre- 

^.''cisely  on  the  ground  that  the  existing  social  order  is  not  perfect, 
and  that  taxation  should  be  one  of  the  instruments  for  amending 
it.  Even  tho  it  be  an  open  question  whether  all  inequality  in 
wealth  and  income  be  unjust,  such  great  degrees  of  inequality  as 
the  modern  world  shows  are  regarded  as  not  consonant  with 
canons  of  justice.  Very  rich  persons  should  be  called  to  pay 
taxes  not  only  in  proportion  to  their  incomes,  but  more  than  in 
proportion.  This  proposal  has  been  called  socialistic;  and  it  is,  if 
all  measures  looking  to  mitigation  of  inequality  be  so  called.  Those 
who  hold  it  place  progressive  taxation  in  the  same  class  with 
free  education,  factory  legislation,  regulation  of  monopolies,  exten- 
sion of  government  management  —  measures  all  of  which  are 


510  TAXATION  [68- §  2 

^'' based  on  a  desire  to  improve  the  social  order  in  the  direction  of 
less  inequality.  The  extent  to  which  they  are  willing  to  go  with 
progression  no  doubt  depends  on  the  degree  of  their  fervor  for 
social  reform  in  general;  nor  are  they  themselves  able  to  give  a 
precise  answer  to  the  question  often  asked,  how  far  is  progression 
to  go?  Their  opponents  have  urged,  to  use  a  much-quoted  phrase 
of  McCulloch's,  that  w^hen  once  you  diverge  from  the  rule  of 
proportion,  you  are  at  sea  without  rudder  or  compass.  The 
same  difficulty  might  be  urged  against  all  sorts  of  movements  for 
reform.  Few  except  the  rigid  and  extreme  socialists  have  clear 
notions  about  their  ultimate  goal.  It  suffices  for  the  average 
man  to  know  in  what  direction  he  is  moving.  Most  unsophisti- 
cated persons  in  the  advanced  countries  of  modern  times,  tho  they 
have  very  hazy  ideas  about  taxation  and  socialism  and  economics 
in  general,  will  instinctively  declare  it  "right"  that  the  rich  should 
contribute  to  the  public  burdens,  as  compared  with  the  poor,  not 
only  in  proportion  to  their  incomes,  but  more  than  in  proportion. 
In  so  saying,  they  show  that  influence  of  the  spirit  of  the  time 
from  which  none  of  us  can  escape. 

Sundry  phrases  have  been  used,  embodying  supposed  prin- 
ciples of  taxation,  which  fail  to  face  this  fundamental  problem. 
u- It  is  often  said  that  taxation  should  be  based  on  "ability"  (the 
Germans  use  the  word  Leistungsfdhigkcit)  or  on  "faculty."  Yet 
it  is  by  no  means  clear  either  that  this  principle  conforms  to 
economic  justice  or  that  it  leads  to  any  certain  conclusion  on  the 
crucial  point  —  proportion  or  progression.  No  doubt,  the  rich 
man's  ability  to  pay  is  greater  than  the  poor  man's.  Does  it 
follow  that  he  should  pay  more  heavily  toward  public  charges? 
His  ability  to  pay  for  bread  and  coal  is  also  greater;  yet  we  accept 
it  as  a  matter  of  course,  and  as  reasonable  and  just,  that  he  should 
pay  for  them  at  the  same  prices  as  persons  of  small  income.  It 
may  be  questioned  whether  this  be  really  just  —  whether  the 
strong  and  efficient,  the  fortunate  and  favored,  should  be  in  a 
position  of  economic  advantage. ^  Such  is  the  way  of  the  modern 
world,  under  the  regime  of  private  property.    Why,  under  that 

1  Compare  Chapter  66,  §  3. 


68- §2]         PRINCIPLES  UNDERLYING  TAXATION  511 

regime,  should  an  entirely  different  principle  be  applied  in  regard 
to  taxation?  Can  the  principle  of  "  ability"  be  declared  abstractly 
just  without  maintaining  also  that  our  economic  system  is  in 
general  unjust? 

In  any  case,  the  principle  of  ability  leads  to  no  clear  conclusion 
on  the  question  of  progression.  Granted  that  the  rich  should 
pay  on  the  basis  of  ability,  the  question  remains,  how  is  that 
"ability"  to  be  measured?  Does  their  ability  increase  in  exact 
proportion  to  their  incomes,  or  more  than  in  proportion?  Those 
who  advocate  ability  or  faculty  as  the  just  principle  for  apportion- 
ing taxes  usually  come  to  a  conclusion  in  favor  of  progression. 
Yet  their  principle  does  not  necessarily  lead  to  that  conclusion. 
They  are  influenced,  tho  not  always  consciously,  by  an  underlying 
belief  that  the  rich  in  general  are  in  an  unduly  favored  position 
and  that  it  is  therefore  equitable  to  apply  to  public  charges  a 
different  rule  from  that  which  holds  in  other  affairs. 

The  same  sort  of  difficulty,  and  the  same  inevitable  harking 
back  to  the  fundamental  questions  of  social  justice,  arises  from 
another  phrase  much  used  in  these  discussions;  namely,  that 
taxes  should  be  so  levied  as  to  bring  "equality  of  sacrifice."  L^n- 
flinchingly  applied,  this  principle  would  lead  to  high  progression 
in  taxation.  Take  away  half  the  income  of  a  poor  man,  and  the 
sacrifice  imposed  on  him  is  vastly  greater  than  when  you  take 
away  half  the  income  of  a  millionahe.  In  the  case  of  the  poor 
man,  taxation  would  exact  what  is  essential  for  life  or  for  meager 
comfort;  in  that  of  the  rich  man,  only  the  means  for  luxury  and 
ostentation.  To  bring  about  equality  of  sacrifice,  you  must  take 
away  a  much  larger  proportion  from  the  millionaire.  The  funda- 
mental question  recurs:  why  equality  of  sacrifice  here,  when  in 
other  matters  no  such  rule  is  followed?  Efficiency,  not  sacrifice, 
is  the  dominant  principle  in  existing  distribution.  Problems  of 
taxation  can  arise  only  in  communities  founded  on  individualism 
and  private  property;  and  to  apply  in  these  a  principle  of  equality 
of  sacrifice  is  to  admit  that  the  working  of  individualism  is  not  to 
one's  liking  —  that  is,  to  undertake,  in  this  regard  at  least,  a 
change  and  a  reformation. 


512  TAXATION  [68-§3 

§  3.  This  same  insistent  question  presents  itself  with  regard 
to  another  much-debated  point:  whether  property  incomes  shall 
be  taxed  at  the  same  rate  as  labor  incomes.  In  the  literatiu'e 
on  taxation,  the  terms  "funded"  and  "unfunded"  incomes  are 
much  used.^  Funded  incomes  are  those  derived  from  income- 
yielding  property,  and  standing  for  interest  or  rent  or  established 
monopoly  gains.  Unfunded  incomes  are  salaries,  wages,  business 
profits,  professional  gains.  We  shall  speak  of  them  as  property 
incomes  and  labor  incomes  respectively.  The  former  last  in- 
definitely; the  latter  cease  at  latest  with  the  lives  of  their  holders. 
Should  they  be  taxed  at  the  same  rate  or  at  different  rates? 

The  difference  in  duration  between  the  two  gives  no  solid  reason 
for  discrimination.  If  it  be  said  that  the  property  incomes,  because 
lasting  longer,  are  really  larger,  the  answer  is  that  the  tax  too  lasts 
longer.  If  the  income  lasts  forever,  the  tax  will  go  on  forever.  There 
is  indeed,  in  one  respect,  a  substantial  difference  in  the  weight  of 
taxation;  the  holder  of  the  labor  income  is  in  many  instances  under 
a  moral  obligation  not  to  use  the  whole  of  his  income,  but  to  save 
some  considerable  portion.  What  he  puts  aside  for  the  future 
use  of  wife  or  children  is  virtually  no  part  of  his  present  income. 
It  will  become  later  a  part  of  the  income  of  the  dependents.  If 
it  is  taxed  now,  and  is  taxed  again  when  it  reaches  the  beneficiaries; 
or  if,  after  it  has  been  invested,  an  income  from  it  inuring  later  to 
the  beneficiaries  is  taxed  in  their  hands  —  then  there  is  double 
taxation  of  the  same  income.  The  holder  of  a  property  income 
may  indeed  do  the  same  thing,  and  his  savings  also  may  become 
the  occasion  of  double  taxes;  but  he  is  not  so  likely  to  put  aside 
part  of  his  present  income,  since  this  passes  on,  presumably  un- 
diminished, to  his  heirs.  On  such  grounds  countries  which  levy 
an  income  tax  often  permit  the  deduction,  from  the  amount  prima 
facie  taxable,  of  certain  sums  paid  out  for  life  insurance  premium. 
The  sums  so  allowed  to  be  deducted  are  limited,  and  only  unmistak- 
able savings  out  of  income  (evidenced  by  insurance  premiums)  are 

1  In  Great  Britain,  the  terms  "unearned"  and  "earned"  are  used;  they  are  ob- 
jectionable because,  even  tho  usually  applied  in  a  purely  technical  sense,  they  im- 
ply a  judgment  on  the  justification  of  the  two  classes  of  income. 


68- §4]         PRINCIPLES  UNDERLYING   TAXATION  513 

considered ;  precautions  of  this  sort  being  necessary  to  prevent  the 
mitigation  from  becoming  a  means  of  evasion.  But  the  principle 
of  lesser  taxes  on  labor  incomes  is  thus  recognized,  and  recognized 
on'the  precise  ground  of  not  taxing  such  sums  as  are  no  effective 
constituents  of  present  income. 

The  common  practise,  however,  of  taxing  property  incomes  at 
a  higher  rate  hardly  rests  on  this  ground.  It  rests  probably  on 
the  same  attitude  toward  social  problems  as  the  common  acquies- 
cence in  progressive  taxes  —  on  a  half-unconscious  admission 
that  justice  does  not  call  for  identical  treatment.  Property  in- 
cornes  stand  for  the  leisure  class  —  for  those  who  contribute 
nothing  directly  to  the  community's  resources,  but  live  on  secure 
income-yielding  possessions.  The  thick-and-thin  defender  of  the 
existing  order  will  indeed  say  that  these  incomes  are  as  just  as  the 
incomes  of  those  who  now  work.  Interest  and  rent  are  as  worthy 
and  as  defensible  as  any  other  sorts  of  income,  and  discrimination 
against  them  by  higher  rates  of  taxation  is  an  unwarranted  admis- 
sion of  lack  of  justification.  The  contention  is  as  unanswerable 
as  is  the  similar  argument  against  progressive  taxes  on  the  rich. 
Nevertheless  most  persons,  tho  they  do  not  formulate  their  con- 
clusions with  care  or  accuracy,  feel  that  somehow  incomes  derived 
from  labor  do  have  a  more  solid  justification  and  that  the  leisure 
class  incomes  do  stand  on  less  defensible  ground.  It  may  be  right 
that  some  fortunate  individuals,  and  their  descendants  forever, 
should  live  in  leisure,  without  doing  a  stroke  of  work.  But  this 
does  not  seem  right  in  the  same  degree  as  "earning"  your  living. 
Hence,  tho  complete  confiscation  of  property  incomes,  thru  taxa- 
tion or  any  other  machinery,  would  be  condemned  by  the  average 
man  as  "dishonest"  or  "  socialistic, "  some  concession  to  the  critical 
and  reforming  spirit  is  made  by  approving  higher  taxes  on  such 
incomes.  Unle  s  there  be  concession  of  this  sort  and  on  this 
ground  there  is  no  logical  basis  for  the  general  application  of  a 
Jower  rate  of  taxation  on  labor  incomes. 

§  4.  Any  conclusion,  then,  in  favor  of  progressive  taxation  and 
of  higher  taxation  of  property  incomes  must  rest,  to  be  consistent, 
on  a  frank  admission  of  unwelcome  features  in  existing  society 


514  TAXATION  [68- §  4 

and  on  a  program  of  social  reform.  The  only  question  will  be 
whether  this  particular  mode  of  reform,  thru  taxation,  is  likely  to 
work  well,  whether  it  may  not  bring  evils  in  its  train,  whether 
other  ways  toward  the  same  end  are  not  better.  And  here  there 
are  serious  reasons  for  proceeding  with  great  caution. 

Some  difficulties  of  administration  which  stand  in  the  way  of 
applying  progressive  scales  will  receive  attention  presently.  They 
vary  with  different  sorts  of  taxes,  as  will  appear  on  a  consideration 
of  particular  'evies.  Let  attention  be  given  here  to  some  questions 
of  principle. 

Progressive  taxation,  so  far  as  it  aims  to  correct  unjustified 
inequalities,  evidently  deals  with  results,  not  causes.  .  It  is  obvi- 
ously better  to  go  to  the  root  of  the  matter,  and  to  deal  with  the 
causes.  Much  the  more  effective  and  promising  way  of  reform  is 
to  promote  the  mitigation  of  inequality  in  other  ways  —  by 
equalization  of  opportunity  thru  widespread  facilities  for  rational 
education,  by  the  control  of  monopoly  industries,  by  the  removal 
of  the  conditions  which  make  possible  illegitimate  profits.  Pro- 
gressive taxation,  which  deals  with  income  (or  property)  solely 
according  to  size,  and  not  according  to  social  desert,  is  less  dis- 
criminating and  also  less  effective  in  reaching  the  ultimate  goal 
than  the  various  ways  of  diffusing  material  welfare  which  have  been 
considered  in  the  preceding  pages. 

It  may  seem  a  simple  matter  to  apply  the  principle  of  progres- 
sive taxation  on  the  basis  of  the  character  of  the  income ;  to  make 
the  rates  progressively  high,  not  in  all  cases  where  the  income  is 
large,  but  in  those  cases  where  income  is  made  large  in  objection- 
able ways.  vThe  principle  seems  clear  enough:  are  the  inequalities 
such  as  induce  activity  that  is  advantageous  to  the  community  as  a 
whole?  Given  the  institution  of  private  property,  with  all  the 
motives  and  ambitions  which  are  part  of  it,  and  a  great  range  of 
inequalities  is  in  this  sense  advantageous.  Interest  is  not  to  be 
dispensed  with,  nor  that  return  for  natural  agents  which  is  indis- 
tinguishably  commingled  with  interest.  Salaries,  professional 
earnings,  business  profits  in  the  strict  sense,  are  inseparably  associ- 
ated with  the  exercise  of  their  faculties  by  those  who  earn  the 


68- §4]         PRINCIPLES  UNDERLYING  TAXATION  515 

incomes.  The  fullest  activities  are  promoted  by  letting  them 
earn  all  they  can;  and  the  greater  the  competition  thus  promoted 
between  them  the  more  likely  is  it  that  the  community  will  be 
amply  supplied  with  useful  services.  Tax  no  such  incomes  on 
the  ground  of  their  size. 

But  to  earmark  the  incomes  thus  "legitimately"  large,  and  to 
distinguish  them  from  the  "illegitimate"  incomes,  is  an  extremely 
difficult  matter.  The  law  must  deal  with  unmistakable  facts;  it 
cannot  be  based  on  general  principles  and  rough  approximations. 
On  the  other  hand  the  conclusions  of  economic  science,  above  all 
on  the  great  social  questions,  are  essentially  in  the  nature  of  rough 
approximations.  .  What,  for  example,  are  "  illegithnate "  profits? 
How  define  them  in  such  manner  as  to  make  them  subject  to 
special  taxation?  We  may  be  certain  that  there  are  such  gains, 
due  to  chicanery,  swindhng,  browbeating  of  the  weak  and  in- 
experienced. How  separate  them  sharply  from  the  profits  secured 
in  ways  advantageous  to  the  community  and  in  accord  with  its 
accepted  standards  of  right  conduct?  To  apply  any  sort  of 
discriminating  taxation,  without  bearing  also  on  the  springs  of 
energy  and  enterprise,  is  impracticable.  The  best  course  is  to  deal 
with  the  causes :  to  protect  the  weak,  to  elevate  the  plane  of  com- 
petition, to  improve  the  law,  to  prosecute  remorselessly  the  guilty. 

Certain  kinds  o  property  income  are  marked  off  more  sharply 
as  not  essential  for  the  working  of  the  individualistic  system, 
and  therefore  peculiarly  fit  for  taxation.  Such  are  urban  site 
rents,  or  rather  those  accretions  of  future  site  rents  which  are  not 
within  the  principle  of  vested  interests.  ^^  Monopoly  profits  are 
in  the  same  class.  Often,  it  is  true,  they  are  as  difficult  to  define 
with  the  necessary  precision  as  are  "illegitimate"  profits.  How 
separate  high  gains  due  to  enterprise  and  good  management  from 
those  arising  purely  from  monopoly?  Yet  there  are  cases  when 
this  can  be  done;  as  where  a  bank  is  given  the  monopoly  of  note 
issue,  or  a  street  railway  or  gas  company  the  monopoly  of  serving 
a  city.  Then  it  is  clearly  proper  to  provide  that  profits  above  a 
given  rate  of  return  on  the  investment  shall  be  divided  with  the 

1  Compare  Chapter  44,  §§  5,  6. 


516  TAXATION  [68- §  5 

state.  The  amount  going  to  the  state  in  such  case  may  be  en- 
titled a  "tax"  or  a  "share."  The  name  is  immaterial;  it  is  in 
essence  a  levy  on  a  certain  kind  of  income,  justified  by  the  principle 
of  removing  inequality  which  brings  no  offsetting  social  gain. 

In  general,  however,  progress  ve  taxation  is  not  practicable  on 
the  basis  of  the  kind  of  income.  It  is  susceptible  of  application, 
on  a  wide  scale,  only  with  reference  to  the  amount  of  income.  To 
many  persons,  th's  will  seem  no  significant  distinction.  To  tax 
an  income  large  in  amount  will  seem  to  them  the  same  thing  as 
taxing  an  income  objectionable  in  kind.  Tho  few  would  carry 
this  sort  of  belief  to  its  logical  outcome  and  condemn  all  inequality 
once  for  all,  there  is  an  instinctive  feeling  that  great  inequalities 
are  bad  and  very  large  incomes  peculiarly  fit  objects  of  taxation. 
The  growth  of  social  sympathy  and  all  the  prepossessions  of 
democracy  strengthen  the  hold  of  the  principle  of  progression  in 
its  undiscriminating  form.  This  state  of  mind,  and  the  inevitable 
formulation  of  the  law  on  sharp  lines,  make  it  well-nigh  certain 
that  progressive  taxation  will  have  wider  and  wider  application. 
The  only  question  will  be  how  far  it  shall  go  and  what  difficulties 
of  administration  it  must  encounter. 

§  5.  Still  another  question  arises  with  regard  to  differential  or 
progressive  taxes  on  property  incomes.  It  is  concerned  with  the 
application  of  progression,  not  according  to  the  source  or  kind  of 
the  property  income,  but  purely  according  to  its  amount. 

The  essential  ground  on  which  interest  can  be  defended  is  that 
the  return  is  necessary  in  order  to  induce  accumulation.  Savin|; 
is  onerous  and  will  not  be  carried  on  unless  there  is  a  return  on 
investments.  But  we  have  seen  that  this  is  by  no  means  the  exact 
situation  with  regard  to  all  savings.  There  are  many  intra-marginal 
savers.^  As  to  these,  the  appropriation  of  part  of  their  income  by 
the  state  would  not  lessen  accumulation.  The  same  principle. is 
applicable  as  in  the  case  of  rent  proper.  A  tax  on  rent  falls  defini- 
tively on  the  owner,  and  has  no  further  effects  on  the  supply  or  the 
utilization  of  the  source  of  rent.  From  this  point  o£  view  there 
may  be  ground  for  progressive  taxation  of  large  property  incomes. 

1  Compare  Chapter  39,  §§  2-4. 


68- §5]         PRINCIPLES  UNDERLYING  TAX.\TION  517 

Those  whose  means  are  large  almost  always  enjoy  some  "  saver's 
rent."  They  may  secm^e  say  four  per  cent  on  their  investments; 
but  the}^  would  maintain  the  investments  intact  in  almost  all 
cases,  even  tho  they  got  only  two  per  cent.  The  capital  sum 
being  large,  a  comfortable  income,  perhaps  a  large  income,  would 
still  be  secured  at  the  lower  rate.  Rather  than  forego  this  income 
accumulation  would  be  maintained  and  capital  would  remain 
undiminished. 

The  same  reasoning  would  apply,  of  course,  in  all  cases  where 
there  is  saver's  rent.  Those  who  save  primarily  in  order  to  make 
provision  for  the  uncertainties  of  the  future,  for  old  age,  for  wife 
and  children,  would  continue  to  do  so  in  large  measure,  even  tho 
mterest  rates  were  much  reduced,  nay,  wiped  out.  The  appropria- 
tion thru  taxation  of  a  part  of  their  income  from  accumulations 
would  not  cause  a  decline  in  social  capital.  But  in  these  cases 
there  is  not  commonly  the  degree  of  inequality  which  gives  rise 
to  the  demand  for  differential  or  progressive  taxation.  Great 
inequalities,  such  as  seem  inconsistent  with  the  democratic  and 
equalizing  spirit  of  our  time,  arise  from  the  very  large  properties, 
which  are  hardly  ever  accumulated  merely  because  of  a  desire  to 
provide  for  the  future.  Social  ambition,  the  love  of  domination, 
the  pride  of  achievement,  are  the  motives  of  the  creators  of  for- 
tunes; social  ambition,  again,  and  the  love  of  ease  are  the  motives 
which  lead  their  descendants  to  maintain  the  fortunes.  A  lower 
rate  of  return  would  not  cause  impairment  of  their  principal  or  a 
diminution  of  the  sources  on  which  the  community's  apparatus  of 
production  depends. 

On  grounds  like  these,  progressive  taxation  of  large  property 
incomes  can  be  advocated;  advocated,  that  is,  if  one  frankly 
accepts  the  view  that  great  inequalities  in  wealth  are  undesirable, 
and  should  be  lessened,  by  taxation  or  other  means,  so  far  as  other 
consequences  equally  undesirable  for  the  community  can  be 
avoided.  In  this  case,  one  possible  undesirable  consequence  is  a  --'  =" 
check  to  accumulation;  but  on  the  strict  theory  of  saver's  rent 
no  check  in  fact  is  to  be  expected. 

Still  other  possible  undesirable  consequences,  however,  arise 


518  TAXATION  [68- §5 

in  connection  with  the  administration  of  taxes.  Some  sorts  of 
taxes  can  be  collected  with  facility  and  certainty.  Others  cause 
endless  difficulties  in  attempts  at  evasion  and  in  demoralization 
of  the  taxpayers.  Income  taxes  more  particularly  cause  such 
difficulties,  and  cause  them  in  greater  degree  according  as  they 
are  levied  on  a  progressive  scale.  This  aspect  of  the  problem  of 
progression  will  be  considered  in  the  next  chapter. 


CHAPTER  69 
Income  and  Inheritance  Taxes 

Section  1.  Income  taxes  present  the  problem  of  progression  sharply,  yet 
should  be  considered  in  connection  with  other  taxes,  519  —  Sec.  2.  In- 
come taxes  limited  as  a  rule  to  the  well-to-do  classes.  The  exemption  of 
small  incomes  rests  partly  on  social  grounds,  partly  on  administrative 
expediency,  520  —  Sec.  3.  The  British  income  tax  and  the  device  of 
stoppage  at  the  source.  The  system  not  consistent  with  progression;  it 
has  undergone  steady  modification,  522  —  Sec.  4.  Progressive  taxation 
on  the  entire  income.  Declaration  necessary.  Conditions  for  the 
effective  administration  of  such  a  tax.  Income  taxes  pecuharly 
adapted  for  readjustment  from  year  to  year  to  fit  fiscal  needs,  527  —  Sec.  5. 
The  income  tax  question  in  the  United  States.  The  system  developed 
since  the  Constitutional  amendment  of  1913,  529  —  Sec.  6.  Inheritance 
taxes  are  comparatively  easy  of  enforcement  and  lend  themselves 
easily  to  progression.  The  trend  toward  progression,  532  —  Sec.  7.  A 
high  rate  of  progression  in  inheritance  taxation  would  check  accumula- 
tion. If  apphed  new  ways  of  ensuring  the  supply  of  capital  must  be 
found,  535. 

§  1.  In  the  preceding  chapter  the  problem  of  justice  was  treated 
as  if  all  taxes  were  paid  out  of  income.  And  this  in  the  end  is 
the  case:  ultimately  all  taxes  are  derived  from  income.  Tho 
many  taxes,  in  the  first  instance,  are  levied  not  with  respect  to 
income  but  with  respect  to  lands  or  houses  or  commodities,  these 
taxes  fall  eventually  on  some  ones  income,  even  if  not  on  that 
of  the  person  first  charged  with  their  payment.  True,  there 
are  some  taxes  which  may  conceivably  cause  a  diminution  not 
of  an  individual's  income,  but  of  his  capital  or  his  accumulated 
possessions.  Such  may  be  the  working  of  taxes  on  inheritances. 
These,  however,  are  effects  not  common  in  modern  communities. 
There  is  no  serious  deviation  from  the  truth  in  sajang  that  taxes 
are  derived  from  income. 

But  tho  taxes  are  paid  out  of  income,  a  comparatively  small 
part  of  the  public  revenue  is  secured  by  direct  levy  on  income. 

519 


520  TAXATION  [69- §2 

Some  countries  have  no  income  taxes  at  all.  Even  those  which 
have  fully  developed  income  taxes  secure  only  a  part  of  their 
revenue  from  this  source.  Moreover,  no  country  endeavors  to 
reach  in  this  way  all  incomes.  Direct  taxes  on  income  are  con- 
fined virtually  to  the  prosperous  members  of  society.  Most  of 
those  who  earn  wages  by  manual  labor  are  not  so  reached.  Their 
incomes  are  affected  by  other  taxes  only,  and  in  ways  of  which  as 
a  rule  they  are  but  dimly  conscious. 

It  follows  that  the  problems  of  justice  in  taxation,  dealt  with 
in  the  last  chapter,  are  to  be  considered  with  reference  not  simply 
to  those  public  levies  which  go  by  the  name  of  income  taxes,  but 
with  reference  to  all  levies  of  whatever  kind.  The  questions 
whether  taxes  should  be  progressive  or  are  in  fact  progressive, 
must  be  answered  with  reference  to  all  the  charges.  It  is  entirely 
possible,  for  example,  that  income  taxes  should  be  progressive, 
yet  the  tax  system  as  a  whole  not  so.  As  will  presently  appear,  a 
great  many  sorts  of  taxes  in  wide  use  are  really  regressive  in  their 
ultimate  effects;  that  is,  they  bear  more  heavily,  in  proportion  to 
income,  on  the  poor  than  on  the  rich  and  the  well-to-do.  Under 
such  conditions,  it  maj^  be  maintained  without  hesitation  that 
taxes  levied  directly  on  the  incomes  of  the  latter  should  be  pro- 
gressive in  order  to  secure  simple  proportionality  for  the  tax  system 
as  a  whole.  Whether  this  is  in  fact  the  case  for  the  tax  system 
of  a  given  country  is  extremely  difficult  to  make  out;  so  uncertain 
is  the  ultimate  effect  of  many  of  the  taxes  commonly  resorted  to. 
But  the  verj'  existence  of  the  question,  and  the  uncertainty  of  the 
answer,  show  that  progression  as  to  taxes  levied  directly  on  income 
is  only  part  of  a  much  larger  problem. 

None  the  less,  the  dispute  concerning  progression  is  specially 
active  and  often  acrid  concerning  direct  income  taxes  alone.  It 
is  so  because  here  the  question  must  be  faced;  whereas  in  the  case 
of  other  taxes  it  is  concealed  and  evaded. 

§  2.  The  limitation  of  income  taxes  to  the  comparatively  well- 
to-do  arises  in  practise  from  the  fact  that  the  trouble  and  cost  of 
direct  levy  make  it  impracticable  to  reach  small  incomes.  It 
costs  at  least  as  much  to  collect  an  income  tax  of,  say,  2  or  5  per 


69- §2]  INCOME  AND  INHERITANCE  TAXES  521 

cent  from  a  man  having  an  income  of  S500  as  from  one  having  an 
income  of  $5000;  it  may  very  possibly  cost  more.  The  revenue 
in  the  one  case  is  ten  times  as  great  as  in  the  other.  To  collect 
from  millions  of  workingmen  a  few  dollars  or  a  few  shillings  each 
would  be  perhaps  not  impossible,  but  almost  ruinously  expensive. 
If  they  are  to  be  reached  at  all  by  taxation,  some  other  way  must 
be  found.  Hence  there  is  exempted  from  income  taxation  in  most 
countries  a  minimum  which  is  above  ordinary  working-class  income 
and  above  the  average  income  of  the  whole  people.  Such  was 
the  effect  in  Great  Britain,  with  the  level  of  wages  and  prices  that 
obtained  before  the  Mar  of  1914-18,  of  the  exemption  of  incomes 
under  £160.  In  the  United  States,  when  incomes  were  taxed 
during  the  Civil  War  period,  only  those  over  $600  were  chargeable. 
In  1917  the  exempt  amount  for  the  head  of  a  family  was  $2000. 

This  limitation  has  often  been  explained  and  defended  on  social 
grounds.  The  poor,  it  is  said,  and  those  who  have  barely  enough 
to  live  on,  should  not  be  taxed.  Obviously,  the  minimum  of 
subsistence  should  not  be  taxed ;  or,  to  speak  more  accurately,  the 
attempt  to  tax  it  should  not  be  made,  since  the  very  term  implies 
that  it  cannot  be  reduced  by  taxation.  When  people  talk  of  not 
taxing  the  minimum  of  subsistence,  they  commonly  have  in  mind 
something  as  variable  as  the  living  wage.  The  demand  for  the 
exemption  of  the  lowest  tier  of  incomes  results  from  the  same  state 
of  mind  as  the  advocacy  of  progressive  taxation  —  dissatisfaction 
with  existing  inequalities  and  desire  to  lessen  them.  Unfortu- 
nately, this  feeling  does  not  lead,  so  far  as  taxation  is  concerned, 
to  any  consistent  results.  Those  who  possess  only  the  "mini- 
mum" or  the  "living  wage,"  tho  exempted  from  direct  levies  on 
their  income  are  in  fact  taxed,  and  often  taxed  heavily,  in  other 
ways.  It  is  onlj^  when  a  proposal  is  made  to  reach  them  overtl}^ 
that  people  balk,  and  insist  on  exemption.  In  the  actual  arrange- 
ment of  the  tax  system,  benevolent  phrases  of  the  kind  cited  are 
used  to  explain  and  justify  exemptions  which  in  fact  are  due 
mainly  to  the  practical  difficulties  of  reaching  small  incomes,  and 
(in  democratic  countries)  the  fear  of  irritating  millions  of  voters; 
whereas,   notwithstanding  the  phrases,   taxes  which  reach  the 


522  TAXATION  [69- §3 

masses  in  unobtrusive  ways  are  levied  on  a  large  scale  with  little 
apolog}^ 

Considered  as  a  matter  of  principle,  it  is  by  no  means  desirable 
that  the  workingmen  as  a  mass  should  not  be  subjected  to  taxes. 
Let  the  taxes  be  moderate,  and  even,  if  you  please,  degressive; 
that  is,  lower  and  lower  in  proportion  as  incomes  become  smaller. 
There  is  no  ground  for  the  assumption  that  the  mass  of  working- 
men  in  advanced  countries  have  barely  the  "living  wage"  and 
should  therefore  be  exempted.  It  is  fit  that  they  too  should 
contribute  toward  the  public  charges.  It  is  desirable,  moreover, 
that  they  should  not  only  pay  but  should  be  conscious  of  paying. 
Much  would  be  gained  if  they  were  not  charged  solely  by  veiled 
indirect  taxes.  Even  tho  they  paid  sums  but  small  in  proportion 
to  incomes,  their  point  of  view  on  public  affairs  would  be  altered. 
Too  commonly,  in  democratic  states,  they  are  not  conscious  of 
contributing  anything  at  all.  Their  attitude  toward  public  busi- 
ness is  simply  that  there  is  a  great  fund  of  money  from  which 
employment  or  largess  can  be  got.  They  rarely  regard  taxation 
as  an  instrument  for  promoting  the  general  welfare.  And  yet 
this  unfortunate  situation  is  extremely  difficult  to  mend.  Taxes 
levied  in  small  sums  are  not  only  expensive  to  collect,  but  are 
irritating  to  the  payers.  The  legislator  who  gets  rid  of  them  not 
only  promotes  administrative  economy;  he  also  gains  popularity. 
Even  so  slight  a  levy  as  the  poll  tax  (a  fixed  small  sum,  say  $1 
or  $2  a  year,  on  each  male  adult)  is  almost  impossible  to  maintain. 

§  3.  Bearing  in  mind  that  in  practise  income  taxes  are  levied 
only  on  the  comparatively  small  number  of  the  well-to-do  and 
rich,  let  us  consider  the  two  great  types  —  one  of  direct  levy  on 
each  individual's  total  income,  the  other  of  levy  on  the  several 
sources  from  which  the  income  is  derived.  The  direct  method 
is  best  exemplified  by  the  practi  e  of  the  German  states,  among 
which  Prussia  is  for  this  purpose  the  most  instructive,  as  well 
as  the  largest.  The  other  method,  of  which  the  salient  char- 
acteristic is  stoppage  at  the  source,  is  exemplified  by  the  practise  of 
England.     It  will  be  convenient  to  examine  first  the  British  system. 

The  British  income  tax  has  sometimes  been  described  as  a 


69- §3]  INCOME  AND  INHERITANCE  TAXES  523 

series  of  taxes,  in  each  of  which  a  special  method  is  adopted  to 
attain  the  same  end.  Wherever  feasible,  the  method  is  to  reach 
the  taxpayer's  income,  not  after  he  has  received  it,  but  before. 
Thus,  to  take  the  simplest  case,  the  government  deducts  from  the 
interest  which  it  pays  on  its  own  debt  the  amount  chargeable  as 
income  tax.  The  holder  of  consols  hence  receives  his  income 
diminished  by  so  much;  thereby  the  tax  has  been  collected.  Every 
debtor,  whether  private  person  or  corporation,  is  required  to  act, 
in  substantially  the  same  waj^,  as  a  sort  of  agent  for  the  govern- 
ment in  collecting  the  income  tax  from  creditors.  Every  debtor 
pays  tax  on  his  full  income,  irrespective  of  his  being  burdened 
by  debt  and  by  an  interest  charge.  But  when  he  pays  the  stipu- 
lated interest  to  his  creditor,  he  is  entitled  to  deduct  the  amount 
(say  10  per  cent  —  whatever  the  income  tax  rate  may  be)  charge- 
able as  tax.  The  creditor  receives  90  per  cent  of  what  would 
otherwise  have  been  his  due,  and  thus  his  income  has  been  reached. 
And,  to  prevent  possible  failure  of  the  system  to  work  out  this 
result,  "contracting  out"  is  made  void;  it  is  provided  that  no 
agreement  between  debtor  and  creditor  by  which  the  latter  is 
to  receive  his  interest  without  income  tax  deduction,  shall  be 
valid.  The  unrestricted  self-interest  of  the  debtor  is  thus  brought 
to  bear  toward  the  collection  of  the  tax  from  the  creditor.  In  this 
manner  the  income  tax  is  secured  in  regard  to  all  bonds  or  deben- 
tures issued  by  British  corporations;  the  corporations  pay  the  full 
tax  on  their  net  receipts,  but  deduct  the  proper  quota  from  each 
bondholder's  income. 

As  regards  another  kind  of  income  often  difficult  to  reach  — 
dividends  on  stocks  —  the  same  principle  is  follow'ed,  and,  as 
regards  British  corporations,  is  followed  with  ease.  The  cor- 
porations are  simply  taxed  on  the  whole  of  their  income,  and  the 
way  in  which  the  stockholder  bears  the  tax  is  that  the  net  earnings 
from  which  his  dividends  arise  are  diminished  by  so  much.  The 
comparative  publicity  with  which  the  affairs  of  corporations  are 
conducted,  especially  of  large  corporations,  is  a  strong  preventive 
of  fraud  in  their  statements  of  earnings,  and  facilitates  the  eflBcient 
collection  of  the  tax. 


524  TAXATION  [69- §3 

Again,  as  regards  income  derived  not  from  British  debtors  or 
British  corporations,  but  from  foreigners,  the  principle  is  also 
followed  so  far  as  practicable.  Such  income  is  a  large  item  in 
Great  Britain,  whose  people  have  great  investments  in  foreign 
regions.  But  these  investments  are  commonly  arranged  and 
managed  by  bankers  or  other  financial  agents,  who  often  act  as 
agents  for  the  remittance  of  interest  or  dividends  to  the  individual 
investors.  When  the}"  so  act,  they  are  required  to  pay  the  income 
tax  on  what  passes  thru  their  hands,  deducting  the  amount  from 
what  is  payable  to  their  clients.  In  this  way  a  surprising  amount 
is  reached.  Evasion  or  concealment  is  virtually  impossible,  since 
it  would  require  collusion  between  the  agent  and  the  scattered 
clients.  Obviously,  the  method  is  inapplicable  where  remittances 
are  made,  not  thru  a  British  banker  or  agent,  but  from  foreign 
parts  direct  to  the  individual  investors.  In  such  case  the  only 
way  to  reach  the  income  is  to  levy  on  the  investor  himself,  calling 
upon  him  to  make  a  declaration  of  this  income. 

Income  from  land  and  real  property  is  always  reached  with 
comparative  ease  in  any  tax  system;  for  land  and  houses  cannot 
be  concealed,  and  the  income  they  yield  is  not  difficult  to  ascertain. 
In  the  English  system  the  occupier  of  real  property  is  liable  for 
income  tax  once  for  all  on  the  rental  value  of  the  premises  occupied 
by  him.  If  he  is  owner,  this  ends  the  matter;  he  has  paid  income 
tax  on  what  as  owner  and  occupier  he  enjoys.  If  he  is  tenant,  he 
is  entitled  to  deduct  from  the  rental  payable  to  the  landlord  the 
income  tax  on  that  sum,  and  the  landlord  thus  finds  his  tax  de- 
ducted and  paid.  Here,  as  in  the  similar  relations  between  debtor 
and  creditor,  "contracting  out"  is  made  void. 

Enough  has  been  said  to  show  how  far-reaching  is  the  method 
of  stoppage  at  the  source.  There  are,  indeed,  some  incomes 
which  cannot  be  so  reached.  The  professional  earnings  of  lawyers, 
physicians,  and  the  like;  the  incomes  of  business  men,  whether 
shopkeepers  or  great  manufacturers  (so  far  as  the  incomes  are  not 
secured  in  the  form  of  dividends  from  corporations  of  a  semi-public 
kind);  returns  from  foreign  investment  which  do  not  go  thru  a 
British  banker's  hands  —  these  cannot  be  tapped  at  the  source. 


69- §3]  INCOME  AND  INHERITANCE  TAXES  525 

Here  some  other  method  must  be  resorted  to.  Declaration  of 
income  is  required  from  the  taxpayer  or  inquiry  instituted  by  the 
tax  collector.  But  much  the  greater  part  of  the  income  chargeable 
with  tax  is  reached  without  personal  declaration  or  obtrusive 
inquiry.  The  greater  part  of  the  British  tax  is  collected  without 
a  word  of  inquiry  or  a  possibility  of  evasion. 

It  is  obvious,  however,  that  this  system  does  not  lend  itself 
easily  to  progression  in  the  taxation  of  incomes.  There  is  indeed 
a  device  for  making  the  tax  degressive;  that  is,  for  lowering  it  on 
modest  incomes,  and  for  exempting  small  incomes  entirely.  It 
may  easily  happen  that  a  person  whose  total  income  is  below  the 
exempt  amount  (£160  until  1918)  may  find  that  his  income  has 
been  taxed  thru  stoppage  at  the  source.  He  then  applies  to  the 
tax  authorities,  declares  his  income  to  be  below  the  taxable  limit, 
and  receives  back  in  cash  what  has  been  reached  by  stoppage  at 
the  source.  The  same  method  is  applied  in  alleviating  the  tax 
on  modest  incomes,  ap  to  £700.  These  are  entitled  to  an  "abate- 
ment, "  varying  by  gradations  according  to  the  size  of  the  income. 
The  possessor  of  an  income  in  this  range,  if  he  has  been  reached  by 
the  machinery  of  stoppage  at  the  source,  also  makes  a  declaration 
to  the  tax  authorities,  and  is  entitled  to  reimbursement  to  such 
extent  as  will  abate  his  income  tax  to  the  extent  contemplated  by 
the  law. 

But,  to  repeat,  the  principle  of  stoppage  at  the  source  is  not 
consistent  with  progression.  A  person  of  large  means  pays  income 
tax,  or  rather  finds  that  income  tax  has  been  paid  for  him,  in  a 
number  of  ways  —  by  various  deductions  from  his  rent,  interest, 
or  dividends.  He  is  never  called  on  to  declare  his  total  income. 
Only  that  income  which  has  not  been  taxed  before  it  reaches  him, 
must  be  directly  ascertained  by  the  tax  authorities.  Doubtless, 
there  are  persons  whose  entire  income  must  be  directly  ascertained, 
such  as  small  tradesmen,  some  lawyers  or  physicians,  possibly 
investors  in  foreign  property.  But  almost  every  person  having  a 
considerable  income  need  make  declaration  of  only  part  of  it  — 
very  likely  of  no  part  at  all.  The  smoothness,  ease,  and  certainty 
of  the  method  of  tapping  the  source  are  inconsistent  with  the 


526  TAXATION  [69- §3 

endeavor  to  ascertain  in  one  lump  the  income  of  each  taxpayer; 
and  without  this  there  can  be  no  appHcation  of  progression. 

Notwithstanding  the  administrative  advantages  thus  secured 
by  refraining  from  the  attempt  at  progression,  the  British  income 
tax  has  been  remodeled  precisely  in  the  direction  of  progression. 
There  can  be  no  stronger  evidence  of  the  strength  of  the  general 
drift  toward  legislation  that  is  hostile  to  inequality.  In  1910,  the 
same  budget  which  made  the  unsuccessful  attempt  to  tax  the 
rising  value  of  urban  land,  established  also  a  "super-tax";  that  is, 
an  addi  ional  tax  on  very  large  incomes,  exceeding  £5000  a 
year.  During  the  war  of  1914-18  the  super-tax  was  applied  to 
incomes  over  £2000,  and  was  made  progressively  higher  as  incomes 
exceeded  that  amount;  so  that  on  the  very  largest  incomes  the 
total  tax  became  something  like  fifty  per  cent.  Such  an  addi- 
tional tax,  of  course,  cannot  be  collected  without  ascertaining  the 
total  incomes  of  all  who  have  incomes  of  this  amount,  or  are 
supposed  to  have.  Thereby  the  income  tax  oflBcials  are  compelled 
to  face  a  new  and  difficult  problem.  They  must  secure  declara- 
tions of  income  with  all  the  difiiculties  of  evasion,  concealment, 
fraud,  which  this  endeavor  necessarily  brings. 

Not  only  in  this  direction  was  there  departure  from  the  strict 
principle  of  stoppage  at  the  source  and  of  proportionate  levy;  it 
was  modified  also  by  the  introduction  of  a  differentiation  between 
labor  and  property  incomes  ("earned"  and  "unearned"  incomes, 
in  the  British  terminology) .  Beginning  in  1907  labor  incomes  were 
taxed  at  a  lower  rate,  the  lelief  being  limited,  however,  to  those 
whose  total  income  from  all  sources  was  moderate  (£3000  or  less) 
and  not  extended  to  those  having  high  incomes.  The  method  of 
abatement  was  again  followed  in  carrying  out  the  new  policy; 
it  necessarily  entailed  a  further  enforcement  of  declaration  by  the 
taxpayer  of  his  entire  income  and  therein  a  further  departure  from 
the  semi-automatic  mechanism  of  stoppage  at  the  source.  The 
whole  British  income  tax,  thus  modified  in  various  ways,  became  a 
patched  and  complicated  structure,  not  conforming  to  any  con- 
sistent plan  and  troublesome  in  administration.  Yet  in  fact  it 
was  administered  without  serious  friction;  and  it  remained  ex- 


69- §4]  INCOME  AND  INHERITANCE  TAXES  527 

traordinarily  effective  as  a  revenue-getter.  The  cumbrous  differ- 
entiation in  favor  of  the  moderate  labor  incomes,  like  the  applica- 
tion of  progression  to  all  incomes  of  large  size,  was  testimony  to 
the  growth  of  the  feeling  that  in  taxation,  as  in  other  fields  of 
government  activity,  regard  should  be  had  to  the  underlying 
currents  of  social  readjustment. 

§  4.  Quite  different  is  an  income  tax  which  has  regard  solely 
to  the  individual's  entire  income.  Such  was  the  Prussian  income 
tax  before  the  Great  War;  the  model  which  the  countries  of  the 
Continent  then  tended  to  follow.  It  has  been  followed  too  by  the 
German  Commonwealth  since  the  war,  tho  with  rates  greatly 
advanced  and  progression  sharply  accentuated.  Necessarily  the 
whole  of  each  taxpayer's  income  must  be  ascertained;  and  the 
principle  of  progression  can  be  applied  with  ease  thruout  the 
entire  range  of  incomes.  The  ascertainment  of  income  can  be 
secured  in  two  ways  —  by  assessment  on  the  part  of  the  authori- 
ties, or  by  declaration  required  from  the  taxpayer.  Assessment 
without  declaration  means  more  or  less  of  guesswork,  and,  espe- 
cially in  the  case  of  larger  incomes,  great  inequalities,  often  glaring 
discrepancies.  Experience  has  proved  that  without  the  require- 
ment no  tax  of  this  kind  works  as  it  is  designed  to  work.  Declara- 
tions must  be  required  —  required  not  only  nominally,  but  in  the 
actual  administration  of  the  tax. 

Declaration,  however,  brings  difficulties  of  its  own.  The 
amount  of  the  levy  is  made  to  depend  on  the  taxpayer's  own 
statement.  The  temptation  to  evasion  and  deceit  is  patent. 
Penalties  for  failure  to  make  a  statement,  or  for  false  statement, 
are  not  easy  to  enforce.  There  is  constant  danger  of  demorali- 
zation among  the  taxpayers,  of  easy-going  connivance  among 
the  officials,  and  so  of  failure  to  attain  the  essential  object  —  the 
precise  adjustment  of  the  progressive  scale  to  actual  incomes. 
In  their  working,  income  taxes  have  too  often  been  a  byword  and 
a  reproach. 

The  difficulties  do  not  arise  merely  from  evasion  and  dishonesty. 
They  rest  in  large  part  on  a  resentment  against  intrusion  on  what 
are  supposed  to  be  private  affairs.    Many  a  man  who  will  cheer- 


528  TAXATION  [69- §4 

fully  pay  a  substantial  tax  on  his  income  is  unwilling  to  submit 
to  prying  eyes  a  detailed  statement  of  that  income.  The  social 
philosopher  may  indeed  say  that  this  is  an  irrational  frame  of 
mind,  nay,  is  something  like  a  confession  of  doubt  as  to  the  justi- 
fication of  the  income.  If  it  is  right  that  one  should  have  a  large 
income,  why  conceal  at  all  its  amount  or  its  source?  But  men's 
ways,  as  they  have  developed  in  the  centuries  during  which  the 
acquisition  of  property  has  been  a  goal  of  ambition,  are  not  so 
simple  as  this  question  implies,  A  strong  instinct  of  privacy  has 
extended  to  the  possession  of  property  and  income;  it  is  present, 
whether  rational  or  not;  and  it  is  violated  by  a  requirement  of  full 
statement,  most  of  all  by  the  chance  of  wide  publicity. 

These  various  difficulties  are  not  insuperable.  An  honest, 
well-trained,  experienced  staff  of  officials,  and  a  well-framed  tax 
system,  can  meet  them  with  sufficient  success.  Declarations 
need  not  be  required  in  minute  detail,  nor  need  they  be  opened 
to  public  inspection.  Some  sort  of  publicity  is  probably  necessary 
as  a  safeguard  against  false  statements;  but  it  need  not  be  publica- 
tion to  the  world  at  large.  It  suffices  if  a  select  body  of  local 
persons  of  experience,  judgment,  and  established  position  are 
enlisted  to  advise  and  cooperate  with  the  permanent  administra- 
tors. These  advisers  must  be  persons  who  are  likely  to  know 
something  of  the  probable  incomes  of  the  several  taxpayers,  and 
before  whom  they  would  not  wish  nor  dare  to  make  statements 
grossly  false.  A  device  of  this  sort  was  used  in  the  Prussian  sys- 
tem, and  is  used  also  in  that  part  of  the  English  system  for  which 
declaration  must  be  resorted  to.  To  go  into  the  details  of  the 
several  methods  would  pass  the  bounds  of  a  book  like  the  present. 
Suffice  it  to  say  that  with  a  proper  permanent  staff  of  capable 
and  tactful  officials,  with  a  steady  requirement  of  declarations, 
with  supervision  and  inspection  not  carried  to  the  stage  of  wide 
publicity,  income  taxes,  even  progressive,  can  be  administered 
successfully.  Not  a  little  depends,  to  be  sure,  on  the  amount  of 
the  tax.  The  higher  it  becomes,  the  greater  is  the  danger  of 
evasion,  the  greater  the  difficulty  of  preventing  demoralization. 

Income  taxes  are  peculiarly  fit  for  readjustment  from  year  to 


69- §5]  INCOME  AND  INHERITANCE  TAXES  529 

year.  Therein  they  are  superior  to  taxes  on  inheritance;  for  these, 
as  will  presently  be  explained,  have  not  the  same  fiscal  flexibility. 
If  income  taxes  are  raised  in  one  year,  all  bear  the  extra  burden; 
if  lowered  another  year,  all  get  the  benefit  of  the  reduction.  In 
Great  Britain  the  income  tax  was  long  used  as  a  means  of  keeping 
the  public  receipts  adjusted  to  the  expenditures  —  raised  in  times 
of  financial  stress  and  lowered  in  ordinary  times.  Obviously,  it 
is  a  necessary  part  of  this  policy  that  in  ordinary  times  the  tax 
should  not  be  pushed  to  the  maximum  which  can  be  safely  exacted. 
A  margin  must  be  left  for  emergencies.  The  British  rate  in  peace 
had  been  not  far  from  eight  pence  (3^  per  cent)  during  the  nine- 
teenth century;  it  went  to  something  like  one  shilling  on  the  pound 
(5  per  cent)  during  the  first  decade  of  the  twentieth  century. 
After  the  outbreak  of  the  Great  War  in  1914,  every  resource  was 
strained  to  the  utmost,  and  the  tax  was  made  to  yield  all  that 
could  be  squeezed  out  of  it.  The  ordinary  or  normal  rate  was 
raised  to  six  shillings  in  the  pound  or  30  per  cent;  while  the  surtax 
on  large  incomes  was  put  as  high  as  four  shillings  six  pence  in  the 
pound  or  22^  per  cent. 

Like  all  taxes,  this  one  proved  difficult  to  lower  when  once 
forced  to  the  top  notch;  and  the  use  of  the  tax  as  a  flexible  instru- 
ment was  endangered.  Something  of  the  same  sort  —  to  antici- 
pate for  a  moment  —  happened  in  the  United  States.  The  in- 
come tax  was  sharply  raised  on  the  entrance  of  this  country  in  the 
European  conflict  and  thereafter  was  retained  at  higher  rates  than 
would  have  been  considered  at  all  had  it  not  been  for  the  accept- 
ance during  the  war  of  measures  ordinarily  deemed  quite  imprac- 
ticable. 

§  5.  In  the  United  States  constitutional  obstacles  stood  for  a 
time  in  the  way  of  a  federal  income  tax.  Such  a  tax  had  been 
levied  and  collected,  it  is  true,  during  the  Civil  War;  but  when 
levied  again  at  a  later  date  (1894),  was  held  not  to  be  valid.  This 
question  was  set  at  rest  by  the  income  tax  amendment  to  the 
Constitution  (1913),  which  gave  Congress  a  free  hand.  In  the 
revenue  act  of  1913  advantage  was  at  once  taken  of  the  authori- 
zation by  levying  a  general  tax  on  incomes.     In  this  regard,  as 


530  TAXATION  [69- §5 

well  as  in  the  simultaneous  establishment  of  the  Federal  Reserve 
banking  system,  the  country  had  rare  good  fortune.  As  we  have 
seen/  the  Federal  Reserve  system,  set  going  in  the  nick  of  time, 
became  extraordinarily  serviceable  during  the  ensuing  years  of  the 
European  war.  In  the  same  way,  the  income  tax,  enacted  at  a 
time  of  profound  peace,  was  brought  into  reasonably  effective 
operation  during  the  next  two  years;  when  the  war  needs  came, 
it  was  available  for  an  immediate  great  yield  of  revenue  tliru  the 
simple  device  of  sharply  raising  the  rate  of  a  tax  already  established 
and  in  working  order.2 

In  the  act  of  1913,  some  attempt  was  made  to  apply  the  principle 
of  stoppage  at  the  source.  But  the  method  was  not  fully  nor 
consistently  applied;  and  as  amendatory  provisions  were  added 
by  subsequent  legislation,  this  method  was  thrust  more  and  more 
into  the  background,  and  finally  was  left  in  operation  at  only  one 
point  of  large  consequence  —  the  taxation  of  corporations  and 
of  the  incomes  of  shareholders  in  corporations.  Conditions  in  the 
United  States  are  in  many  respects  favorable  to  collection  at  the 
source.  It  is  true  that  some  intricate  problems  of  administration 
are  involved.  As  regards  the  taxation  of  incomes  from  real 
property,  there  is  a  real  or  apparent  conflict  with  the  states  and 
local  bodies.  Most  important  of  all  among  the  obstacles  to  its 
full  application,  however,  is  the  inherent  and  inevitable  conflict 
with  the  principle  of  progression.  And  so  strong  is  the  drift 
toward  progression  that  any  tax  system  which  runs  counter  to  it 
must  sooner  or  later  give  way. 

The  American  income  tax,  as  developed  in  1913-1919,  was  levied 

1  Compare  Chapter  27,  §  6. 

2  In  the  edition  of  this  book  which  was  published  in  1914,  shortly  after  the  pas- 
sage of  the  revenue  act  of  1913,  I  wrote  of  the  income  tax  then  established:  "Taxa- 
tion of  incomes  by  the  federal  government  has  come  to  stay.  It  is  probable  not 
only  that  such  a  levy  will  be  a  permanent  part  of  the  revenue  system  of  the  United 
States,  but  that  the  rate  will  become  higher  and  that  the  progression  will  be 
accentuated.  Fiscal  exigencies  will  not  fail  sooner  or  later  to  lead  to  a  rise  in  the 
rate;  and  the  growing  spirit  of  social  readjustment  will  cause  the  progression  to  be 
more  marked.  That  same  spirit,  as  well  as  eventual  fiscal  need,  may  bring  about 
—  what  is  much  to  be  desired  — -  a  reduction  of  the  exempt  minimum  and  a  reach- 
ing down  of  the  tax  to  a  somewhat  deeper  social  stratum."  This  forecast  was  veri- 
fied in  a  surprisingly  brief  space  of  time. 


69- §5]  INCOME  AND  INHERITANCE  TAXES  531 

in  two  parts:  a  "normal"  tax,  uniform  for  all  incomes  (tho  subject 
to  some  degression  on  those  of  small  size),  and  an  "additional" 
tax,  or  "surtax,"  analogous  to  the  super-tax  of  the  British  system, 
but  applying  progression  more  systematically  and  sharply.  The 
normal  tax  had  been  but  one  per  cent  in  1913;  it  was  as  high  as 
twelve  per  cent  at  the  time  of  greatest  fiscal  need,  and  was  reduced 
to  eight  per  cent  at  the  close  of  the  war.  As  has  just  been  inti- 
mated, it  was  applied  once  for  all  to  the  net  incomes  of  corpora- 
tions, and,  being  collected  from  them  was  deemed  (as  in  effect  it 
was)  a  tax  on  the  source  of  shareholders'  incomes.  Incomes 
received  by  individuals  on  corporate  shares  accordingly  were 
treated  as  if  already  taxed,  and  dividends  were  not  again  subject 
to  levy;  to  this  extent  the  tax  was  collected  at  the  source.  In 
other  respects,  however,  the  start  made  in  1913  toward  a  wide 
application  of  that  method  was  not  maintained.  Barring  the 
treatment  of  corporate  incomes  and  of  dividends,  and  some  other 
provisions  of  minor  consequence,  reliance  was  placed  on  the 
taxpayer's  declaration. 

As  in  all  income  tax  legislation,  a  minimum  was  set  which  was 
exempt  from  taxation;  with  the  further  provision  that  this  mini- 
mum was  in  no  event  to  be  reckoned  as  part  of  any  one's  taxable 
income.  Even  in  the  case  of  the  very  largest  incomes,  not  the 
whole  was  to  be  taxed,  but  only  the  excess  above  the  stated  exemp- 
tion. The  exempt  amount  at  the  outset  (in  1913)  was  S^,000 
for  the  head  of  a  family  (the  ordinary  case),  and  $3,000  for  not 
the  head  of  a  family. 

These  exemptions  were  unduly  liberal.  On  the  monetary 
scale  of  pre-war  days  an  income  of  $4,000  meant  a  considerable 
degree  of  prosperity  and  gave  no  valid  claim  to  complete  exemp- 
tion from  income  tax.  When  the  exigencies  of  war  compelled 
a  less  timorous  policy,  the  exempt  amounts  were  lowered  to  $2,000 
and  $1,000  respectively.  As  it  happened  these  lowered  figures 
almost  at  once  became  too  low.  The  inflation  of  prices  and  wages 
brought  it  about  that  $2,000  in  1918  and  1919  had  a  purchasing 
power  less  than  half  that  of  1913.  The  exempt  amount,  unduly 
great  at  the  outset,  became  unduly  small  almost  immediately 


532  TAXATION  [69- §  6 

after  amendatory  steps  were  taken.  There  is  no  better  illustration 
of  the  unexpected  and  complete  disruption  which  the  war  brought 
in  all  pecuniary  standards. 

The  other  part  of  the  system,  the  additional  tax  or  surtax, 
necessarily  led  to  a  requirement  of  declaration  by  each  and  every 
person  liable  to  any  tax  at  all;  since  by  this  process  only  could  it 
be  ascertained  what  was  the  sum  total  of  his  income  and  whether 
he  was  liable  to  surtax.  In  1913  the  rates  of  the  surtax,  like  those 
of  the  normal  tax,  were  low.  But  during  the  war  they  were 
raised  to  figures  that  would  not  have  been  dreamed  of  during  the 
first  stage.  The  highest  surtax  in  1913  had  been  7  per  cent  on  that 
part  of  any  person's  income  which  was  in  excess  of  $500,000.  In 
1919  the  highest  rate  was  65  per  cent  on  that  part  of  income  ex- 
ceeding $1,000,000.  Ten  years  before,  such  an  application  of 
progression  would  have  been  thought  beyond  the  bounds  of  possi- 
bility or  of  reason.  Yet  under  the  stress  of  military  and  patriotic 
excitement  it  encountered  no  serious  opposition;  and,  tho  not 
unlikely  to  be  mitigated  with  the  eventual  return  to  conditions 
deemed  normal,  it  left  as  an  aftermath  of  the  war  the  permanent 
embodiment  in  the  federal  tax  system  of  radically  progressive 
taxes  on  large  incomes. 

No  attempt  was  made  to  differentiate  between  property  incomes 
and  labor  incomes.  This  defect  —  such  it  must  be  deemed,  in 
view  of  the  general  acceptance  of  the  equity  of  some  differentia- 
tion —  was  doubtless  due  to  the  initial  endeavor  to  apply  on  a 
wide  scale  the  method  of  stoppage  at  the  source.  As  regards 
progression,  the  logic  of  that  method,  leading  as  it  does  to  a  flat 
rate,  was  disregarded  from  the  start.  It  left  its  traces  in  the 
equal  treatment  of  the  two  kinds  of  incomes  between  which  there 
is  the  greatest  social  cleavage. 

§  6.  Inheritance  taxes  present  administrative  problems  some- 
what different  from  those  of  income  taxes.  Progression  is  easier 
of  application.  At  the  same  time,  the  question  of  principle  —  is 
progression  right?  —  presents  itself  more  sharply. 

The  transfer  of  property  at  death  must  be  subject  to  supervision 
by  a  court  or  by  an  administrative  bureau  resembling  a  court,  to 


69- §6]  INCOME  AND  INHERITANCE  TAXES  533 

prevent  contention  or  fraud  among  those  who  may  lay  claim  to 
the  property.  Hence  in  all  civilized  countries  the  making  of  wills 
is  carefully  regulated,  and  probate  officials  or  judges  have  super- 
vision over  the  winding  up  of  decedents'  estates.  Their  powers 
are  exercised  directly  on  the  persons  charged  by  law  with  the 
distribution  of  the  estates  —  the  executors  or  administrators. 
This  gives  a  convenient  opportunity  for  collecting  a  tax.  The 
executors  and  administrators  are  called  on  to  pay  the  taxes,  and 
not  released  from  their  obligations  until  they  have  given  proof  of 
the  payment. 

Evasion  of  such  taxes,  if  they  are  carefully  arranged,  is  not  easy. 
The  tax  statute  can  be  drafted  in  such  a  way  that  the  net  is  tight. 
Change  of  residence  may  indeed  be  tried,  to  another  jurisdiction 
where  no  such  taxes  are  in  force.  This  mode  of  evasion  is  obvi- 
ously possible  as  regards  the  several  states  of  our  Union,  since  it  is 
probable  that  some  among  them  will  not  levy  inheritance  taxes, 
or  will  levy  them  only  at  low  rates.  But  the  more  widespread 
are  inheritance  taxes,  the  less  is  there  opportunity  for  a  successful 
and  convenient  change  of  residence.  Inheritance  taxes  levied  by 
the  federal  government  obviously  can  be  evaded  only  by  transfer 
of  residence  to  a  foreign  country  levying  no  such  taxes  or  much 
lower  ones. 

Gifts  made  during  life,  especially  to  children,  constitute  another 
mode  of  evasion.  They  are  commonly  made  subject  to  tax  on  the 
same  scale  as  inheritances;  but  a  more  effective  obstacle  than 
such  legal  equivalence  is  the  reluctance  of  property  owners  to 
part  with  their  own,  even  to  their  nearest  and  dearest.  The 
various  possible  means  of  evasion  are  of  course  likely  to  be  resorted 
to  in  proportion  as  the  rate  of  tax  is  high,  most  of  all  that  of  gifts 
inter  vivos.  Here,  as  with  many  other  kinds  of  tax,  a  moderate 
rate  is  apt  to  be  more  effective  in  practise,  more  really  equable, 
more  productive  of  revenue,  than  a  higher  one. 

Inheritance  taxes  are  not  equal  in  their  effects  —  that  is,  do 
not  bear  equally  on  all  the  taxpayers  —  unless  they  are  main- 
tained at  the  same  rates  for  a  long  period.  Given  time  enough, 
all  estates  must  run  the  gauntlet.     But  if  the  rates  are  changed  at 


534  TAXATION  [69- §6 

short  intervals,  some  successions  will  pay  at  one  rate,  while  others 
of  precisely  the  same  amount  and  kind  will  pay  at  a  dilTerent  rate. 
Hence  this  form  of  taxation,  unlike  the  taxation  of  incomes, 
shou'd  not  be  resorted  to  in  order  to  meet  varying  financial  needs. 
In  1898,  during  the  war  with  Spain,  the  United  States  levied 
inheritance  taxes  ranging  (according  to  the  size  of  the  estate  and 
the  degree  of  relationship)  from  f  of  1  per  cent  to  15  per  cent. 
Shortly  after  the  war,  the  revenue  being  redundant,  these  taxes 
were  repealed  (1901).  The  estates  of  those  who  happened  to  die 
within  these  three  years  were  subjected  to  the  tax;  but  a  vastly 
greater  number  never  were.  Such  legislation  violates  the  first  and 
simplest  canon  of  taxation  —  that  of  equality  in  levy  on  all  persons 
in  like  circumstances.  Great  Britain  followed  a  wiser  course  in 
maintaining  her  inheritance  taxes  unchanged  even  under  the 
extraordinary  exigencies  of  the  war  years  1914-18.  Tho  such  taxes 
cannot  be  expected  to  remain  indefinitely  at  the  same  rates  —  with 
changes  in  the  public  attitude  toward  the  underlying  social  prob- 
lems, new  policies  must  come  into  effect  —  the  rate  should  be 
relatively  permanent,  not  shifted  under  the  influences  of  political 
overturns  or  of  current  fiscal  needs. 

In  the  fully  developed  system  of  inheritance  taxes  of  Great 
Britain  (as  consolidated  under  the  legislation  of  1894),  the  highest 
rate  on  estates  going  to  direct  descendants  was  8  per  cent,  levied 
on  estates  exceeding  £1,000,000;  on  large  properties  going  to  noji- 
relatives,  the  highest  rate  was  18  per  cent.  These  figures  were 
still  further  raised  after  the  close  of  the  Great  War,  when  a  deliberate 
revision  was  undertaken  (1920).  On  moderate  estates  no  changes 
of  importance  were  made;  but  on  larger  ones  the  advances  were 
sharp,  the  maximum  (on  properties  over  £2,000,000)  being  fifty 
per  cent  on  transmissions  to  other  than  direct  descendants.  In 
the  United  States  the  pressure  for  revenue  during  the  war  of  1917- 
18  led  once  more  to  the  enactment  of  a  federal  inheritance  tax. 
The  rates,  like  those  of  the  income  taxes  of  the  same  period,  were 
made  sharply  progressive  on  the  larger  properties.  Moderate 
inheritances,  up  to  $50,000,  were  left  entirely  exempt.  Above 
this  exempt  limit,  each  successive  increment  was  taxed  at  a  higher 


69- §7]  INCOME  AND  INHERITANCE  TAXES  535 

rate;  the  first  taxable  increment  being  the  amount  between  $50,- 
000  and  $100,000,  subject  to  a  rate  of  1%,  while  the  maximum 
was  reached  with  25%  on  the  amount  in  excess  of  $10,000,000. 
No  differentiation  was  attempted  between  direct  descendants  and 
collaterals,  or  between  relatives  and  non-relatives. 

In  the  early  years  of  the  twentieth  century  the  states  of  the 
Union  had  also  established  inheritance  taxes.  Sometimes  these 
were  on  collateral  successions  only;  but  the  tendency  was  to  reach 
direct  successions  also,  tho  at  lower  rates.  Between  the  several 
states  (such  of  them  as  enacted  the  taxes  —  not  all,  but  a  steadily 
growing  majority)  the  rates  were  unequal,  and  the  scope  and  the 
effective  burdens  were  different.  The  ubiquity  of  corporate 
organization,  and  the  endeavor  of  each  state  to  secure  an  inheri- 
tance tax  with  respect  to  every  corporation  and  every  share  of 
corporate  property  on  which  it  could  lay  hands,  led  to  irregularities 
and  duplications.  With  the  federal  tax  superadded  after  1916 
(when  the  first  step  toward  taxing  inheritances  was  taken  by 
Congress)  there  developed  an  unseemly  situation:  a  tendency  in 
each  jurisdiction  to  grasp  everything  in  reach  and  to  stretch  to  its 
advantage  every  doubtful  question  of  constitutional  and  statute 
law.  Among  the  many  problems  in  the  apportionment  of  revenues 
between  the  federal  government  and  the  states,  and  among  the 
states  themselves,  this  proved  perhaps  the  most  troublesome. 

The  most  promising  solution  would  seem  to  be  in  a  system  by 
which  all  inheritance  taxes  should  be  levied  and  collected  by  the 
federal  government,  but  a  distribution  of  the  revenue  arranged 
between  the  federal  government  and  the  several  states.  Such  a 
system  would  have  to  be  deliberately  planned  as  regards  the  range 
of  rates,  the  scale  of  progression,  and  the  differentiation  between 
near  relatives,  distant  relatives  and  strangers.  Unfortunately 
the  local  jealousies  of  the  several  states,  and  the  obstacles  which 
our  constitutional  system  and  our  political  habits  place  in  the 
way  of  consistent  and  well-planned  legislation  by  Congress,  make 
it  quite  uncertain  whether  any  rational  plan  of  this  kind  will  ever 
be  put  into  effect. 

§  7.  The  general  question  of  inheritance  in  its  relation  to  in- 


536  TAXATION  [69- §7 

equality  and  to  the  working  of  the  whole  system  of  private  prop- 
erty has  already  been  considered.^  It  will  suffice  to  refer  sum- 
marily to  the  principles  involved  and  their  bearing  on  the  fiscal 
and  administrative  problems. 

The  argument  and  the  sentiment  in  favor  of  progression  are 
stronger  than  in  the  case  of  income  taxes.  The  inheritance  of 
fortunes,  the  perpetuation  thru  all  time  of  conspicuous  inequality 
by  the  accident  of  birth,  the  grave  doubt  whether  effortless  acquisi- 
tion and  enjoyment  of  fortunes  promote  the  best  happiness  of  the 
beneficiaries  themselves,  the  moral  scandal  of  the  mode  of  living 
among  many  of  those  born  rich  —  all  strengthen  the  objections 
to  great  inequalities  in  wealth.  So  far  as  inheritance  taxes  can 
be  levied  without  serious  administrative  difficulties,  there  can 
be  no  consistent  argument  against  progression  in  communities 
which  try  in  many  other  ways  to  lessen  inequality  and  mitigate 
its  consequences.  Simple  proportion  —  the  same  flat  rate  on  all 
inheritances  —  can  be  defended  only  on  the  ground  that  any  and 
every  interference  by  the  state  with  the  existing  distribution  of 
wealth  is  to  be  opposed  and  condemned. 

On  the  other  hand  there  stands  the  essential  ground  on  which 
the  institution  of  inheritance  rests.  It  is  the  great  engine  for  the 
maintenance  of  capital.  So  long  as  the  maintenance  and  increase 
of  the  community's  capital  depend  on  the  way  in  which  individuals 
deal  with  their  property,  inheritance  cannot  be  struck  at  its  roots 
without  checking  accumulation  and  investment. 

But  this  ultimate  limit  does  not  mean  that  there  is  no  room  for 
the  application  of  progression.  Considerable  amounts  can  be 
lopped  from  all  properties  without  affecting  the  maintenance  of 
capital  at  all;  up  to  a  certain  point  the  taxes  will  be  paid  out  of 
accrued  income.  Still  larger  amounts  can  be  taken  without 
leading  to  harmful  loss.  So  vast  is  the  savable  fund  in  modern 
communities,  so  increasingly  strong  are  the  motives  which  lead  to 
saving,  that  something  can  be  diverted  from  the  swelling  stream 
without  lessening  Its  volume.  Evidently  the  question  here  Is  one 
of  degree.    The  inflowing  accumulations  will  no  doubt  remain 

1  See  Chapter  55,  §  6. 


69- §7]  INCOME  AND  INHERITANCE  TAXES  537 

great  even  tho  moderate  deductions  be  made  from  ordinary  estates 
and  large  amounts  withdrawn  from  the  small  number  of  great 
estates.  Changes  of  this  character,  however,  leave  the  situation 
essentiall}'  unchanged.  Inheritance  still  retains  its  efficacy  as  the 
essential  force  for  maintaining  capital  intact. 

Pass  beyond  this  limit  —  apply  progression  so  sharply  or  limit 
inheritance  so  narrowly  that  accumulation  is  seriously  affected  — 
and  you  must  supply  ways  of  filling  the  gap.  The  public  must  see 
to  it  that  the  needed  material  outfit  is  supplied  by  some  other 
process.  It  is  not  at  all  impossible  that  this  should  be  done.  The 
notion  that  capital  cannot  be  got  together  except  by  the  process  of 
saving  on  the  part  of  individuals  in  the  familiar  way  is  untenable. 
It  is  part  of  the  general  narrowness  of  thought  under  which  no 
industrial  structure  is  believed  possible  except  that  to  which  we 
are  habituated.  What  is  true,  and  is  not  usually  faced  by  the 
advocates  of  drastic  restriction  of  inheritance,  is  that  something 
more  than  mere  restriction  is  involved  in  their  program.  New 
institutions  and  new  organs  must  be  found.  The  state  might 
conceivably  set  up  its  own  bureau  for  handling  estates  subject  to 
devolution,  keeping  the  principal  intact  and  separating  the  funds 
strictly  from  current  budget  operations.  In  another  direction  too 
the  state  might  deliberately  provide  for  the  increase  of  capital. 
It  might  own  and  manage  great  industries,  operate  them  at  a 
profit,  and  build  up  new  or  larger  plants  out  of  the  profits.  Pre- 
cisely in  this  way,  by  the  process  of  putting  the  profits  back  into 
the  enterprise,  great  accumulations  and  great  fortunes  have  been 
built  up  under  private  ownership,  and  great  additions  made  to  the 
community's  capital. ^ 

No  such  course  of  action  has  yet  been  deliberately  followed  by 
governments  and  no  such  results  have  yet  been  achieved  on  any 
considerable  scale.  True,  public  trustees  under  jurisdiction  of 
courts  have  handled  with  success  property  in  process  of  settlement. 
True,  also,  occasional  instances  can  be  found  of  industries  run  by 
governments  which  have  enlarged  their  plant  out  of  profits  But 
in  both  directions  the  quantitative  significance  is  slight.     It  is  no 

1  Compare  Chapter  51,  on  Great  Fortunes. 


538  TAXATION  [69- §7 

sensible  deviation  from  the  truth  to  say  that  governments,  when 
they  enter  on  industrial  enterprises  or  enlarge  them,  borrow  the 
capital ;  they  rely  on  private  savings.  It  is  also  no  sensible  devia- 
tion from  the  truth  to  say  that  when  governments  lay  hands  on 
private  property  thru  heavy  inheritance  taxes  they  not  only 
trench  on  the  accumulated  savings  of  private  persons  but  use 
the  proceeds  for  ciu-rent  fiscal  needs  and  without  provision  for  the 
maintenance  of  the  capital  that  comes  under  their  control.  We 
are  confronted  here  once  more  by  the  fundamental  questions  that 
underlie  the  debate  between  public  and  private  management  of 
industry,  and  between  socialism  and  private  property.  They  are 
questions  of  the  character  and  intelligence  of  the  individuals 
whom  we  vaguely  call  the  public.  Whether  conservation  of 
capital  shall  be  deliberately  and  successfully  managed  by  govern- 
ment depends  on  the  quality  of  the  persons  to  whom  the  govern- 
mental functions  are  intrusted,  and  thus  on  the  quality  of  the  elec- 
torate by  whom  those  are  chosen.  We  have  to  hark  back  once  more 
to  the  underlying  problems  of  human  character,  human  motives, 
the  nature  of  our  inborn  traits,  the  possibilities  of  modifying  them 
thru  environment  and  education,  the  perfectibility  of  man  and  of 
man's  institutions.  On  many  of  these  matters  we  are  much  in 
the  dark.  And  therefore  we  can  see  our  way  but  dimly  into  the 
future,  must  proceed  tentatively,  must  remain  uncertain  of  the 
kind  of  social  structure  which  the  coming  generations  will  establish. 


CHAPTER  70 
Taxes  on  Land  and  Buildings 

Section  1.  Taxes  on  land  {e.g.  an  urban  site)  rest  definitively  on  the  owner,  and 
operate  to  lessen  economic  rent  by  so  much,  539  —  Sec.  2.  Taxes  on 
buildings  tend  to  be  shifted  to  the  occupier.  Qualifications  and  limita- 
tions of  this  proposition,  542  —  Sec.  3.  Effects  of  taxes  on  real  property 
—  land  and  buildings  combined,  544  —  Sec.  4.  In  the  long  run,  it  makes 
no  difference  in  the  incidence  of  such  taxes  whether  they  are  first 
imposed  on  owner  or  tenant;  but  for  short  periods  it  does.  Similarly,  it 
is  in  the  main  of  no  concern  whether  the  assessment  be  on  rental  or  on 
capital  value;  tho  in  some  respects  the  two  methods  bring  different  results, 
546  —  Sec.  5.  Concealed  taxation  of  workingmen  thru  taxes  on  their 
dweUings,  548  —  Sec.  6.  Taxes  on  real  property  should  be  primarily  local 
taxes,  549. 

§1.  Taxes  on  real  property  —  land  and  buildings  —  play  a 
large  part  in  all  modern  tax  systems.  For  long  periods  in  the  his- 
tory of  European  countries  they  were  almost  the  only  taxes;  since 
real  propertj^  was  the  only  sort  of  wealth  which  could  be  effectively 
reached.  The  taxes  which  now  exist  in  the  older  countries  of 
Western  civilization  are  largely  survivals  or  descendants  from  such 
taxes  of  older  days.  They  even  descend,  in  a  sense,  from  the  dues 
of  the  feudal  system.  But  they  have  been  transformed  and  re- 
shaped, and  they  now  retain  their  important  place  in  financial 
legislation  for  the  simple  reason  that  land  and  buildings  are  on 
the  spot,  cannot  be  moved,  and  their  owners  must  submit  to  what- 
ever tax  is  imposed  on  them. 

Let  us  consider  first  the  effects  of  the  taxation  of  land  by  itself 
—  of  land  irrespective  of  any  changes  or  improvements  made  by 
man.  For  the  purpose  of  considering  this  case  let  us  suppose 
an  urban  site  of  great  value,  not  improved  by  man,  or  improved 
so  slightly  that  the  important  and  effective  element  in  its  value 
is  the  land  per  sr.  Not  infrequently,  in  our  American  cities,  a 
lucrative  central  site  is  occupied  by  a  one-story  flimsy  shop,  used 

539 


540  TAXATION  [70- §  1 

for  retail  trade  and  commanding  a  considerable  rental  ^  —  one  very 
high  compared  with  the  cost  of  erecting  the  building.  This  sort 
of  utilization  of  the  site  is  but  temporary,  due  to  hesitation  on  the 
owner's  part  as  to  when  and  how  the  full  economic  rent  of  the  site 
can  be  secured ;  or  due  possibly  to  uncertainty  in  the  legal  title  and 
consequent  unwillingness  on  the  part  of  any  one  to  make  improve- 
ments. Not  uncommonly  under  these  circumstances  a  cheap 
dramshop  is  erected,  because  such  an  establishment  is  most  sure 
to  yield  a  good  rental,  irrespective  of  the  neatness  or  attractive- 
ness of  the  building  itself.  Assume  now  that,  for  whatever  reason, 
a  valuable  site  is  in  this  state.  According  to  oiu"  American  prac- 
tise, it  will  be  taxed  on  its  full  selling  value  as  it  stands  —  for  a 
large  sum  as  regards  the  land,  a  small  one  as  regards  the  building. 
The  total  tax,  at  such  a  rate  as  is  common  in  our  cities  (say  2  per 
cent  on  the  capital  value),  will  very  possibly  be  greater  than  the 
whole  rental  secured  from  the  shop.     Who  would  bear  such  a  tax? 

The  owner  would  gladly  shift  it  to  the  tenant,  by  charging  him 
a  higher  rental.  Clearly  the  owner  cannot  do  so.  Presumably 
the  tenant  is  already  charged  with  a  rental  commensurate  with  the 
profit-yielding  possibilities  of  the  site  as  it  stands.  The  owner 
from  the  outset  will  exact  all  that  can  be  got.  The  tax  will  enable 
him  to  get  no  more.  Nor  would  a  reduction  in  the  tax  cause  him 
to  be  content  with  less ;  he  would  still  demand  and  secure  all  that 
the  site  was  worth.     The  tax  falls  definitively  on  the  owner. 

Such  is  the  general  proposition  to  be  laid  down  with  regard  to 
taxes  on  land.  They  fall  on  the  owner  once  for  all.  They  operate 
as  so  much  diminution  of  rent.  In  the  extreme  case  a  tax  equiva- 
lent to  the  full  rent  of  land  can  be  exacted,  without  any  other  effect 
than  that  of  depriving  the  owner  of  his  income.  If  a  greater 
amount  is  assessed,  the  land,  of  course,  will  cease  to  be  used;  the 
owner  and  occupier  alike  will  abandon  it. 

This  proposition  rests  on  the  assumption  that  land  is  "rack- 
rented  "  —  that  the  owner  exacts  in  rental  as  much  as  he  can  pos- 
sibly obtain.     Such  is  not  necessarily  the  case.     Thru  ignorance 

1  I  use  in  this  Chapter  "rental"  to  signify  what  is  paid  by  tenant  to  owner  for 
a  parcel  of  realty;  "rent"  in  the  sense  of  economic  rent. 


70- §1]  TAXES  ON  LAND  AND  BUILDINGS  541 

or  carelessness  he  may  let  a  tenant  have  it  for  less  than  might  be 
got  by  the  sharpest  bargaining.  In  a  country  like  England,  agri- 
cultm-al  land  was  long  owned  and  managed  for  the  satisfaction  of 
social  ambition  as  well  as  for  immediate  pecuniary  return  and  was 
not  infrequently  let  to  farmers  on  indulgent  terms.  Under  such  cir- 
cumstances an  additional  tax  levied  on  the  landholder  will  prob- 
ably lead  him  to  look  sharply  at  his  rentals,  and  to  take  in  all  the 
slack.  There  is  much  discussion  in  England  as  well  as  in  other 
countries  on  the  expediency  of  taxing  ground  rents;  that  is,  of 
making  a  direct  levy  on  the  owners  of  sites.  Those  who  advocate 
the  measure  lay  it  down  with  confidence  that  such  a  tax  will  affect 
the  owners  only,  and  will  neither  affect  tenants  nor  raise  the  price 
of  the  articles  produced  (or  sold)  on  the  premises.  They  are  right 
—  provided  that  the  land  is  already  rack-rented. 

Consider  now  the  operation  of  such  a  tax  if  it  has  been  long 
imposed  at  the  same  rate  and  seems  certain  to  continue  indefinitely. 
Any  one  who  therea"ter  purchases  the  land  will  allow  for  the  tax, 
and  will  pay  a  price  based  on  its  net  return  after  the  tax  has  been 
paid.  This  later  purchaser  will  feel  no  burden  from  the  tax;  hence 
some  persons  are  led  to  speak  of  this  as  "burdenless"  taxation. 
It  is  burdenless,  at  the  later  stage,  simply  because  the  first  owner 
has  borne  the  burden  once  for  all.  In  effect,  a  special  permanent 
tax  on  the  site  amounts  to  the  appropriation  by  the  state  of  so 
much  of  the  value  of  the  site.  Such  appropriation  may  or  may 
not  be  wise  —  this  raises  the  whole  question  of  the  ground  for  pri- 
vate property  in  land  and  for  the  private  title  to  economic  rent. 
The  tax  is  burdenless  only  if  it  has  prevented  some  part  of  the 
economic  rent  from  ever  getting  into  any  individual's  hands. 

These  principles  hold  good  of  agricultural  land  as  well  as  of  lu-ban 
sites.  A  tax  on  strictly  economic  rent  in  either  case  falls  on  the 
owner.  We  have  seen  that  in  the  case  of  agricultural  land  it  is 
peculiarly  difficult  to  draw  the  line  between  the  rent  of  land 
proper  and  the  return  on  capital  invested  in  the  land;i  and  for  that 
reason  the  effect  of  a  tax  on  agricultural  land  is  in  practise  not  so 
easy  to  follow.    Yet  there  can  be  no  doubt  that  there  is  a  vast 

1  See  Chapter  42,  §  5. 


542  TAXATION  [70- §2 

amount  of  land  in  old  countries,  and  in  the  older  parts  of  new 
countries,  which  is  above  the  margin  of  cultivation  and  yields  some 
rent;  and  to  all  such  land  the  propositions  regarding  the  effects 
of  a  tax  hold  good. 

§  2.  Taxes  on  buildings  present  a  different  case.  Buildings 
may  be  taken  as  typical  of  improvements  on  land,  or  capital  em- 
bodied in  the  land.  The  case  of  buildings  is  instructive,  because 
it  is  comparatively  easy  to  draw  the  line  between  the  land  itself 
and  the  capital  invested  in  it. 

Suppose  a  situation  removed  as  far  as  possible  from  that  con- 
sidered in  the  previous  section.  Suppose  a  building  erected  on 
land  whose  value  is  negligible.  Such,  for  example,  are  dwellings  on 
the  extreme  edge  of  cities  or  suburbs,  or  factory  buildings  in  small 
villages  or  in  the  open  country.  The  familiar  "three-decker"  of 
New  England  is  often  of  this  sort  —  the  three-story  wooden  apart- 
ment house,  occupied  by  mechanics  and  other  prosperous  working' 
men,  in  suburbs  and  outlying  districts. 

A  tax  imposed  on  such  a  dwelling  tends  to  be  borne  by  the  oc- 
cupier. If  the  owner  is  also  the  occupier  the  situation  is  simple 
enough;  the  burden  clearly  must  be  borne  by  him.  If,  as  is  com- 
monly the  case,  the  dwelling  is  let  and  is  built  with  the  expectation 
of  letting,  the  burden  is  likely  to  be  shifted  to  the  occupier  (ten- 
ant) in  the  shape  of  higher  rental.  The  building  will  not  be  put 
up  unless  the  owner  has  reason  to  believe  that  the  rental  will  yield 
him  the  current  return  on  investment,  and  will  yield  that  return 
net;  that  is,  after  payment  of  all  expenses.  Taxes  are  reckoned 
by  him  among  the  expenses.  If  a  net  return  of  five  or  six  per  cent 
is  looked  for,  the  rental  will  be  expected  to  yield  a  gross  return  of 
eight,  nine,  or  ten  per  cent.  The  difference  covers  depreciation, 
expenses  of  management,  repairs,  insurance,  and  —  not  least  — 
taxes.  If  all  taxes  were  remitted  —  if  the  public  revenue  were 
secured  in  entirely  different  ways  —  competition  between  house 
owners  and  house  builders  would  bring  rentals  down.  And,  con- 
versely, if  taxes  were  to  be  greatly  increased,  house  owners  and 
house  builders  would  sooner  or  later  recoup  themselves  for  this 
higher  expense  by  charging  higher  rentals. 


70- §2]  TAXES  ON  LAND  AND  BUILDINGS  543 

This  would  be  the  result  in  the  long  run.  It  would  not  neces- 
sarily or  even  probably  appear  over  short  periods.  The  proximate 
cause  determining  rentals  is  the  supply  of  house  accommodations 
in  its  relation  to  the  demand.  A  remission  of  taxes  would  not  neces- 
sarily lower  them  at  once;  this  consequence  would  ensue  only  after 
the  greater  return  to  the  owners  had  stimulated  an  increase  in  the 
supply  of  houses.  Minor  changes  in  the  tax  rate  —  a  bit  of  an  in- 
crease one  year,  a  decline  in  another  —  would  not  change  them  at 
all.  The  owners  alone  would  be  affected,  grumbling  loudly  in  the 
one  case,  in  the  other  enjoying  the  remission  in  quiet. 

There  are  circumstances  under  which  the  shifting  of  such  taxes 
would  not  take  place  at  all.     In  a  city  whose  population  is  declin- 
ing, house  rentals  are  governed  solely  by  the  principle  of  quasi- 
rent.     The  houses  are  there,  and  cannot  be  removed.     The  cost 
of  erecting  them  and  the  ordinary  rate  of  interest  on  investments 
have  no  influence  on  their  return.     The  question  is  simply  one  of 
an  existing  supply  in  relation  to  a  declining  demand.     An  increase 
of  taxes  in  such  a  place  would  not  cause  rentals  to  go  up;  the  owners 
would  have  to  pay  the  taxes  out  of  their  owm  pockets  once  for  all. 
After  a  very  long  time,  a  readjustment  would  doubtless  take  place. 
Houses  do  not  last  forever.     As  some  wear  out  and  disappear,  new 
ones  will  not  be  built  in  a  decaying  town  to  replace  them.     Given 
time  enough,  the  process  of  shifting  taxes  will  indeed  work  itself 
out.     But  the  time  required  may  be  long  —  decades,  even  gener- 
ations.    The  same  situation  may  develop  in  a  particular  part  even 
of  a  growing  city.     Some  sections  may  come  to  be  out  of  favor; 
fashion  or  convenience  may  cause  people  to  move  elsewhere;  and 
then  the  houses  in  the  half-abandoned  sections  will  be  in  the  same 
position  as  are  all  the  houses  in  a  declining  town. 

In  a  rapidly  growing  city  the  process  of  shifting  takes  place,  not 
indeed  with  mathematical  exactness,  but  with  considerable  cer- 
tainty. Houses  will  not  be  built  for  letting  unless  this  is  worth 
while;  and  it  will  not  be  worth  while  unless  the  owners  get  the  cur- 
rent rate  of  return  over  and  above  taxes.  The  increasing  demand 
for  house  room  due  to  growing  population  will  not  be  met  unless 
rentals  are  high  enough  to  make  good  the  owner's  outlay  for  taxes. 


544  TAXATION  [70- §3 

Such  is  the  common  case  in  our  American  cities.  Indeed,  it  is  the 
case  in  most  cities  of  the  Western  world;  for  the  phenomenon  of 
urban  growth  has  shown  itself  in  almost  all  countries.  Taxes  on 
buildings  tend  to  be  borne  by  the  occupiers. 

What  holds  good  of  dwellings,  holds  good  also  of  buildings  let 
for  business  purposes.  Here  also,  if  we  fasten  attention  on  a  case 
where  buildings  alone  figure  in  the  capital  account,  it  is  obvious 
that  taxes  add  so  much  to  running  expenses,  and  must  be  re- 
couped to  the  investing  owner  in  order  to  induce  him  to  erect  the 
building.  Here,  also,  the  principle  of  quasi-rent  must  be  borne 
in  mind.  A  business  structure  once  put  up  is  there  for  good,  and 
its  rental  depends  not  on  the  expectations  and  calculations  of  the 
owner  but  on  the  supply  of  this  particular  sort  of  accommodation 
in  relation  to  the  demand  —  on  the  adaptability  of  the  premises 
and  on  the  growth  and  prosperity  of  the  city.  In  a  decaying  town, 
or  for  obsolescent  kinds  of  buildings,  rentals  will  tend  to  decline 
in  any  case  and  the  owner  will  find  no  possibility  of  shifting  his 
taxes  to  a  tenant. 

In  the  case  of  business  structures  a  still  further  process  of  shift- 
ing is  probable.  Just  as  the  investing  owner  regards  taxes  as  ex- 
penses, and  expects  to  be  recouped  for  them  in  his  charges,  so  the 
business  occupier  regards  his  rental  as  an  expense,  and  expects 
to  be  recouped  for  it  in  his  profits.  This  is  most  obviously 
the  case  in  retail  dealings,  where  rental  of  the  premises  may  be  a 
large  part  of  the  total  expenses  of  the  tradesman.  High  charges 
for  premises  (that  is,  for  buildings  —  not  high  ground  rent)  will 
mean  higher  prices  for  the  goods  sold,  and  the  effect  of  higher 
taxes  will  tend  to  be  somewhat  higher  charges  on  the  community 
at  large.  Taxes  will  be  very  widely  shifted  and  diffused;  that  is, 
they  will  tend  to  be  so  diffused,  if  competition  is  active  in  the  par- 
ticular business  and  if  business  profits  conform  to  their  normal 
range. 

§  3.  The  common  case,  as  to  iu*ban  realty,  is  not  that  land  alone 
or  buildings  alone  stand  for  the  greater  part  of  the  capital  value, 
but  that  each  enters  as  a  substantial  part  of  the  total.  In  the  heart 
of  a  great  city,  the  site  will  stand  for  more  than  the  buildings,  even 


70- §3]  TAXES  ON  LAND  AND  BUILDINGS  545 

tho  these  be  substantial  and  expensive.  In  outlying  districts,  the 
buildings  will  represent  the  larger  part  of  the  selling  value;  yet  the 
land  still  counts.  Now,  according  to  the  distribution  between 
these  two  constituents,  the  incidence  of  taxes  will  be  different. 
That  portion  of  the  tax  which  is  levied  on  the  selling  value  (the 
capitalized  rent)  of  the  site,  remains  definitivel}^  as  a  tax  on  the 
owner  That  portion  which  is  levied  with  respect  to  the  building 
tends  to  be  shifted  to  the  tenant.  Here,  as  in  the  previous  sec- 
tion, we  must  have  in  mind  the  long-run  operation  of  the  taxes. 
The  immediate  effect  is  commonly  that  the  owner  bears  the  burden. 
Every  parcel  of  real  property  yields  proximately  a  rental  fixed  by 
its  serviceableness,  and  not  directly  affected  by  taxes.  It  is  only 
by  affecting  the  supply  of  buildings  that  taxes  on  them  tend  to  be 
shifted  to  tenants. 

The  long-continued  levy  of  taxes  on  a  site,  at  the  same  rate, 
brings  about,  as  we  have  seen,  a  decline  in  the  selling  value  of  the 
site.  So  much  of  the  economic  rent  has  been  appropriated  by  the 
state.  The  effect  of  taxes  has  not  been  to  raise  ground  rents,  but 
to  lessen  the  net  return  to  the  o^Tier.  "\^^lere  the  site  is  highly  valu- 
able, a  tax  at  the  rates  common  in  American  cities  —  say  2  per 
cent  on  the  selling  price  —  means  the  appropriation  by  the  com- 
munity of  a  very  substantial  part  of  the  economic  rent.  And  where 
the  value  of  land  is  rising,  taxes  rise  in  proportion,  and  some  slice 
of  the  unearned  increment  is  steadily  going  into  the  public  treasury. 
If  it  were  not  for  the  taxes,  the  net  yield  of  the  sites  would  be  so 
much  greater,  and  their  selling  price  correspondingly  higher.  The 
high  value  of  land  in  our  large  cities  is  thus  a  source  of  much  revenue 
to  the  taxing  body  (that  is,  usually  the  city),  and  at  the  same  time 
of  a  revenue  hardly  felt  as  a  tax  by  any  one.  It  simply  prevents  the 
rent  of  land  and  its  value  from  rising  even  higher;  and  since  this  is 
foreseen  and  expected  by  every  one,  no  purchaser  suffers.  Evi- 
dently the  same  result  would  ensue  if  the  whole  of  the  future  rise 
in  value  were  absorbed  in  taxation. 

The  large  and  constantly  growing  revenue  from  this  source,  even 
at  the  present  rates,  accounts  in  no  small  degree  for  the  extrava- 
gance of  American  municipal  government.     The  business  districts 


546  TAXATION  [70- §4 

of  New  York  City,  for  example,  are  a  vast  treasure  house  for  the  tax 
collector,  as  they  are  also  in  even  greater  degree  for  their  owners. 
The  enormous  revenue  collected  from  them  in  taxes  makes  possible 
a  measure  of  waste  and  corruption  which  would  be  intolerable 
under  taxes  not  levied  in  this  burdenless  way.  The  same  is  true, 
only  to  a  less  degree,  of  our  other  great  cities,  in  which  urban  rents 
are  also  large  and  rising,  and  in  which  also  taxes  on  sites  are  steadily 
productive  of  increasing  revenue. 

§  4.  Whether  a  tax  on  real  property  be  collected  in  the  first  in- 
stance from  owner  or  occupier  is,  in  the  long  run,  not  material. 
The  practise  in  the  United  States  is  to  levy  on  the  owners;  and  in  the 
preceding  section  the  incidence  of  taxes  has  been  discussed  as  if 
this  were  always  done.  In  England,  and  in  European  countries 
generally,  however,  the  practise  is  to  levy  on  the  occupier. 

If  the  occupier  is  called  on  to  pay  the  tax  or  taxes  on  real  prop- 
erty, both  he  and  the  owner  will  consider  the  payment  in  calcu- 
lations about  rentals.  So  far  as  the  tax  is  levied  with  respect  to 
site  value,  the  pecuniary  advantage  of  the  site  to  the  tenant  is 
diminished  by  the  amount  of  the  tax,  and  the  rent  he  will  pay  in 
order  to  secure  the  site  will  be  so  much  less.  If,  on  the  other  hand, 
the  tax  levied  with  respect  to  buildings  and  improvements  is  col- 
lected not  from  the  owner  but  from  the  occupier,  the  owner  obvi- 
ously will  be  able  to  offer  the  facilities  at  a  lower  rate,  and  will  be 
impelled  by  competition  so  to  offer  them.  The  nominal  rental 
in  either  case  will  be  less  if  the  occupier  is  called  on  for  the  taxes. 
The  difference  is  in  the  mode  of  collection,  not  in  the  incidence  of 
the  tax. 

All  this,  however,  holds  good  only  if  taxes  are  certain  in  amount 
and  thus  calculable.  Unexpected  taxes  are  likely  in  all  cases  to 
remain  once  for  all  a  burden  on  the  persons  from  whom  payment 
is  directly  demanded.  If  owner  and  tenant  come  to  an  agreement 
on  rentals,  a  new  tax  or  an  increase  of  tax  falls,  during  the  term 
of  the  agreement,  on  that  one  of  them  who  is  directly  chargeable. 
In  the  United  States,  where  the  practise  is  to  levy  on  the  owner,  it  is 
he  who  feels  the  brunt  of  all  new  taxes  or  increased  taxes.  He  can 
shift  them  to  his  tenant  (if  at  all)  only  when  the  time  comes  for  a 


70- §4]  TAXES  ON  LAND  AND  BUILDINGS  547 

new  lease.  In  England,  where  the  practise  is  to  levy  on  the  occu- 
pier, he  in  turn  must  pay  during  the  term  of  his  lease,  and  can  ef- 
fect a  readjustment  in  such  manner  as  to  leave  the  tax  burden  on 
the  owner  (in  the  case  of  site  rental),  only  when  the  time  for  renewal 
comes.  In  the  United  States,  it  is  not  infrequently  stipulated  in 
leases  that  the  tenant  shall  assume  all  taxes,  even  tho  the  landlord 
be  chargeable  with  them  by  the  law.  Clearly,  both  the  owner  and 
tenant  will  consider  this  assumption  of  liability  in  their  bargain 
on  the  stipulated  rental.  Such  agreements  concerning  tax  pay- 
ment are  often  simply  a  way  of  chaffering  about  the  rental,  es- 
pecially where  site  rent  plays  a  large  part.  If  the  site  be  valuable 
and  in  demand,  the  tenant  will  assume  the  payment  of  taxes  virtu- 
ally as  a  mode  of  bidding  higher  for  the  site,  and  will  take  his 
chances  as  to  unexpected  changes  in  tax  rates. 

Another  difference  between  American  and  European  practise  is 
in  the  basis  of  assessment.  In  the  United  States  taxes  on  real  prop- 
erty are  commonly  assessed  on  capital  value,  that  is,  on  selling 
value.  In  Europe  they  are  usually  assessed  on  annual  rental  value. 
Thus  in  the  United  States  the  usual  tax  on  real  property  is  some 
such  rate  as  $1.50  per  $100  of  selling  pr  ce,  or  1^  per  cent  on  the 
capital,  charged  on  the  owner.  In  England  a  common  tax  is  5 
shillings  in  the  pound  of  rental  value,  or  25  per  cent  of  the  rental, 
charged  on  the  occupier.i  These  rates  are  roughly  the  same  in 
their  proportion  to  rentals.  And  in  either  case  their  incidence  is 
in  the  end  the  same,  differing  (in  the  manner  described  above) 
according  as  the  realty  owes  its  value  predominantly  to  site  or 
to  improvements.  There  is,  indeed,  one  case  in  which  the 
two  methods  reach  different  results;  namely,  where  rental  value 
does  not  correspond  with  capital  value.  This  is  most  striking 
where  urban  land  is  vacant,  and  yet  has  a  selling  value  because  of 
the  rent  which  it  would  yield  if  occupied,  or  which  it  is  expected 
soon  to  yield  from  the  growth  of  population.  Such  land  has,  as  it 
stands,  no  rental  value,  or  an  insignificant  rental  value;  and  m 

1  These  at  least  were  representative  tax  rates  before  1914.  The  monetary  up- 
heavals of  the  European  war  led  to  chaos  in  tax  rates,  as  in  other  matters;  higher 
figures  became  common,  and  once  established  were  likely  to  persist  for  an  indefinite 
period. 


548  TAXATION  [70- §5 

England  it  is  taxed  lightly  or  not  at  all.  Because  it  has  a  consider- 
able selling  value,  it  may  be  taxed  heavily  in  the  United  States. 
The  case  is  similar  where  the  land,  tho  built  on  and  used,  is  not 
used  to  the  best  advantage,  having  obsolete  or  temporarj^  build- 
ings. It  would  then  be  taxed  lightly  in  England,  on  the  basis 
of  its  actual  rental.  It  would  be  taxed  heavily  in  the  United 
States,  on  a  selling  value  representing  the  capitalization  of  its 
potential  rent. 

The  American  practise  has  advantages  and  disadvantages.  It 
has  the  advantage  of  forcing  land  into  use.  Every  owner,  being 
taxed  on  the  capital  value  of  his  land,  is  under  pressure  to  make  its 
contract  rental  correspond  to  its  potential  rent,  and  hence  to  im- 
prove it  rapidly.  The  English  practise  permits  the  owner  to 
wait.  He  will  often  wait,  partly  from  inertia,  partly  from  a 
wish  to  bide  his  time  until  the  most  profitable  use  of  the  site 
becomes  quite  clear.  The  American  practise  has  the  disadvantage 
of  stimulating  a  feverish  haste  in  getting  sites  into  use.  The  gen- 
eral speculative  and  profit-gathering  trend  of  American  life  would 
doubtless  lead  in  any  event  to  some  such  haste;  but  it  is  made 
greater  by  our  method  of  taxation.  Hence  the  sprawling  aspect 
of  those  American  cities  which  are  rapidly  growing.  Lots  in  the 
outlying  districts  are  built  on,  perhaps  prematurely,  with  the  design 
of  getting  a  return  from  rentals ;  intermediate  lots  are  vacant,  their 
owners  holding  on  for  a  while.  In  England,  where  rental  value 
alone  is  the  basis  of  taxation,  land  comes  into  the  market  in  a  more 
slow  and  orderly  fashion.  The  American  practise  has  the  further 
advantage  of  appropriating  for  the  community,  thru  the  machinery 
of  taxation,  a  larger  slice  of  the  unearned  increment. 

§  5.  Workingmen,  like  all  occupiers  of  dwellings,  are  reached  by 
the  taxes  on  dwellings.  They  are  indeed  reached  also  by  the  taxes 
on  shops  and  factories,  which  enter  into  the  expenses  of  merchants 
and  manufacturers  and  tend  with  more  or  less  irregularity  to  be 
shifted  to  consumers.  But  this  second  sort  of  shifting  is  so  con- 
cealed as  to  be  difficult  to  follow  in  any  concrete  way.  Taxes  on 
dwellings,  however,  in  so  far  as  they  are  levied  with  respect  to  the 
structures,  increase  house  rentals  beyond  question,  and  so  cause 


70-§6l  TAXES  ON  LAND  AND  BUILDINGS  549 

their  occupiers,  and  the  workmen  among  them,  to  bear  a  share  of 
the  public  burdens. 

This  indirect  effect  of  taxation  on  workingmen  appears  not  only 
in  the  United  States,  where  all  such  taxes  are  first  collected  from  the 
owners,  but  in  England,  where  they  are  usually  collected  from 
the  occupiers.  The  English  mode  of  levy  is  subject  to  exception 
in  the  case  of  workingmen 's  tenements.  Here  the  taxes  are  col- 
lected not  from  the  occupier,  but  from  the  owner;  or,  if  not  from 
the  owner  of  the  site,  from  a  lessee  who  has  taken  the  whole  of  the 
premises  and  sublets  them  to  the  actual  occupiers.  The  same 
obstacles  which  stand  in  the  way  of  the  collection  of  income  taxes 
from  persons  of  small  means  appear  where  taxes  on  real  property 
are  sought  to  be  collected  from  the  occupiers  of  small  tenements. 
The  expense  of  administration  is  larger,  and  there  is  irritation  to  the 
taxpayer.  It  is  much  simpler  to  charge  the  landlord  a  lump-sum 
tax  on  the  whole,  and  let  him  recoup  himself  by  larger  rentals  from 
the  several  tenants  or  subtenants.  This  is  commonly  done  in  Lon- 
don and  other  large  English  cities,  the  landlord  being  allowed  to 
"compound"  as  the  phrase  goes,  and  getting  a  slight  reduction 
from  the  usual  tax  rate  by  way  of  commission  for  thus  acting  as 
taxgatherer. 

The  final  result  is  that  the  workingman  is  taxed,  but  rarely  knows 
that  he  is  taxed.  He  pays  the  going  rentals  for  his  house  room, 
and  does  not  know  that  in  this  rental  is  included  a  tax  charge. 
The  situation  is  doubtless  inevitable;  but  it  is  unfortunate.  It 
much  affects  the  attitude  of  the  average  laborer  toward  public 
affairs.  All  that  he  is  conscious  of  is  the  public  outgo,  of  which  he 
is  aware  because  the  city  or  state  is  an  employer  of  labor.  The 
public  income  from  taxes  does  not  seem  to  concern  him.  He  is 
commonly  in  favor' of  expenditure,  with  little  regard  to  the  wisdom 
of  the  expenditure;  for  increased  taxes  seem  to  be  none  of  his  con- 
cern. Some  sort  of  direct  levy  on  every  voter  would  much  pro- 
mote watchfulness  and  discrimination  in  public  affairs;  yet  it  seems 
hopeless  to  retain  any  taxes  of  the  sort. 

§  6.  Taxes  on  real  property  are  in  the  United  States  and  in  Great 
Britain  chiefly  local  taxes.     That  is,  they  are  levied  and  collected 


550  TAXATION  [70- §6 

chiefly  by  the  local  bodies  —  by  the  towns,  cities,  and  counties  in 
the  United  States,  by  the  boroughs  and  counties  in  England.  The 
revenue  from  them  then  goes  to  defraying  the  expenses  of  the  local 
be  dies.  Yet  this  limitation  to  local  use  is  by  no  means  univer- 
sally or  completely  the  case.  A  land  tax  levied  by  Parliament 
still  exists  in  England,  tho  it  has  come  to  be  small  in  amount  and  is 
in  process  of  extinction.  The  English  income  tax  reaches  income 
from  real  property,  and  the  revenue  so  obtained  goes  to  the  central 
government.  In  the  United  States  the  revenue  of  the  several 
states  was  originally  derived,  and  is  still  largely  derived,  from  the 
general  property  tax  in  which  the  taxes  on  real  property  have  been 
by  far  the  most  important  constituent.  Nevertheless,  it  may  be 
said  that  in  English-speaking  communities  the  tendency  is  toward 
using  taxes  on  real  property  as  strictly  local  taxes,  leaving  the 
central  government  to  get  its  revenue  in  other  ways  —  by  income 
taxes,  inheritance  taxes,  taxes  on  trade  and  communication,  not 
least,  taxes  on  commodities. 

The  same  tendency  is  beginning  to  show  itself  on  the  Continent. 
There  taxes  on  land  and  buildings,  thru  long  use  and  contnued 
tradition,  have  been  assessed  and  levied  by  the  central  government. 
The  local  bodies,  the  communes,  have  simply  followed  in  the  track 
of  the  central  government,  using  its  machinery  and  assessments 
and  imposing  for  their  own  purposes  supplements  or  percentual 
additions  to  the  state  taxes.  Such  is  still  the  situation  in  most 
countries  of  the  Continent.  A  break  in  the  system  has  been  made 
in  Prussia,  where  taxes  on  land  and  buildings,  and  some  other  so- 
called  "direct"  taxes  of  a  similar  sort,  have  been  turned  over  once 
for  all  to  the  local  bodies,  the  state  retaining  for  itself  the  income 
tax.  Other  German  states  have  followed  the  Prussian  example, 
and  it  is  probable  that  in  the  course  of  time  other  countries  of  the 
Continent  will  do  likewise. 

This  relegation  of  taxes  on  real  property  to  local  bodies  is  wise. 
Local  bodies  are  most  likely  to  administer  such  taxes  equably,  and 
in  administering  them  are  free  from  difficulties  which  commonly 
arise  in  local  administration  of  other  levies.  Income  taxes,  for  ex- 
ample, tend  to  drive  people  away  from  the  places  where  they  are 


70-§6]  TAXES  ON  LAND  AND  BUILDINGS  551 

imposed;  if  local  they  would  induce  a  competition  between  cities 
and  towns  to  attract  residents  by  low  rates  or  lax  assessment. 
Taxes  on  securities  are  open  to  the  same  objection,  as  will  appear 
more  clearly  in  the  next  chapter.  Most  taxes  on  the  production 
or  sale  of  commodities  are  subject  to  similar  competitive  evasion. 
The  list  of  taxes  really  available  for  local  bodies  is  limited,  while 
at  the  same  time  their  financial  needs  are  great  and  growing. 
Hence  it  is  desirable  that  taxes  on  land  and  buildings,  which  are 
peculiarly  available  for  local  bodies,  should  be  left  to  them  solely. 


CHAPTER  71 
Taxes  on  Commodities 

Section  1.  Direct  and  indirect  taxes.  Various  ways  in  which  "indirect" 
taxes  are  levied  on  commodities,  552  —  Sec.  2.  In  the  simplest  case, 
of  a  competitive  commodity  produced  under  constant  returns,  a  tax  tends 
to  be  shifted  to  consumers.  Explanation  and  qualification  of  this  prin- 
ciple, 553  —  Sec.  3.  Complexities  where  the  commodity  is  produced 
under  increasing  or  diminishing  returns;  where  there  is  monopoly.  Cau- 
tions to  be  observed  in  the  apphcation  of  theoretic  reasoning  on  these 
topics,  555  —  Sec.  4.  Taxes  on  imports  present  no  peculiarities,  except 
as  they  bring  a  rival  untaxed  supply  and  thus  raise  the  questions  concern- 
ing protection,  558  —  Sec.  5.  Taxes  on  commodities  are  little  noticed  by 
consumers.  They  are  commonly  on  articles  of  large  consumption,  and 
regressive  in  their  effects.  A  large  and  varied  list  of  articles  is  most 
easily  reached  by  customs  duties,  559. 

§  1.  Taxes  such  as  have  been  described  in  the  preceding  chapters 
on  income,  property,  inheritance,  are  commonly  spoken  of  as  direct 
taxes.  By  this  phrase  is  meant  that  the  legis'ator,  in  levying  them, 
has  no  expectation  or  intention  that  they  shall  be  shifted  to  any 
other  persons  than  those  first  called  on  to  pay  them.  Taxes  which, 
on  the  other  hand,  are  expected  to  be  shifted  to  others  are  called 
indirect  taxes.  As  we  have  seen,  the  so-called  direct  taxes  are 
shifted  not  infrequently ;  but  they  are  not  levied  with  this  in  view, 
and  the  process  of  shifting  is  often  uncertain.  "Indirect"  taxes, 
on  the  other  hand,  are  levied  on  the  supposition  that  the  persons 
first  called  on  will  transfer  the  burden  to  others  and  will  transfer 
it  with  tolerable  ease  and  certainty. 

The  simplest  and  most  familiar  of  indirect  taxes  are  taxes  on 
commodities.  The  phraseology,  it  must  be  borne  in  mind,  is  loose. 
Just  as  there  are  not,  in  strictness,  any  taxes  on  property,  but  only 
taxes  which  persons  owning  property  are  compelled  to  pay,  so  there 
are  no  taxes  on  commodities,  but  only  taxes  levied  on  persons 
when  they  deal  with  commodities  in  a  particular  way.    A  tax  "  on 

652 


71- §2]  TAXES  ON  COMMODITIES  553 

tobacco'  may  be,  for  example,  a  tax  on  the  manufacturer  of  to- 
bacco levied  on  the  basis  of  the  number  of  pounds  of  that  article 
as  they  pass  out  of  his  factory.  A  tax  "on  sugar"  may  be  as  it 
formerly  was  in  Germany,  a  tax  of  so  much  per  hundredweight  of 
the  beets  used  in  making  the  sugar,  collected  from  the  manufac- 
turer when  the  beets  are  delivered  at  his  establishment.  A  tax  "  on 
imports  "  is  one  collected  from  merchants  and  others  on  the  occasion 
of  their  bringing  articles  across  the  frontier  from  other  countries. 

The  precise  stage  and  the  precise  way  in  which  these  various 
persons  are  called  on  to  pay  such  taxes  is  much  affected  by  the 
possibility  of  evasion.  Thus,  under  the  method  of  taxing  sugar 
beets  formerly  followed  in  Germany  (now  given  up,  for  reasons 
that  need  not  be  here  discussed),  evasion  was  difficult,  because 
beets  were  bulky,  and  the  operation  of  bringing  them  to  the  fac- 
tory could  easily  be  supervised.  The  method  used  in  our  Amer- 
ican taxes  on  tobacco  and  cigars,  of  compelling  the  taxed  person 
to  buy  stamps  and  affix  these  on  the  articles  at  a  given  stage  in  his 
operations,  has  the  administrative  advantage  that  the  articles  can- 
not be  marketed,  in  case  of  evasion,  on  any  except  the  smallest 
scale;  since  the  absence  of  the  stamps  would  inform  all  the  world 
of  the  violation  of  law.  Taxes  levied  on  importation  are  collected 
with  great  ease  in  modern  times,  because  the  regular  channels  of 
transportation,  by  railway  or  steamer,  are  extremely  cheap,  and 
smuggling  by  out-of-the-way  routes  ordinarily  entails  greater 
expense  than  evasion  of  the  duty  would  make  worth  while.  In 
the  eighteenth  century  the  situation  was  different,  and  smuggling 
was  a  factor  much  to  be  reckoned  with  in  the  administration  of  im- 
port duties. 

All  these,  however,  are  matters  of  detail,  often  very  important 
detail,  to  be  dealt  with  in  special  books  on  taxation  and  finance. 
Our  concern  is  with  some  general  questions  concerning  the  eco- 
nomic effects  of  these  taxes 

§  2.  Consider  first  the  simplest  case:  an  internal  tax,  or  excise, 
imposed  at  some  stage  in  the  p-oduction  of  a  commodity.  A  stage 
in  manufacturing  operations  is  usually  chosen,  because  manu- 
facture means  concentration  of  operations  and  hence  ease  of  sup)er- 


554  TAXATION  [71- §2 

vision.  Suppose  the  commodity  to  be  one  produced  under  the 
conditions  of  constant  cost  and  free  competition.  Then  the  effect 
of  the  tax  is  simple.  The  price  oi  the  commodity  will  be  raised  by 
the  amount  of  the  tax.  The  producer  will  shift  this  amount  on  the 
consumer,  and  the  real  burden  w  11  thus  fall  on  the  latter. 

This  result  will  not  be  necessarily  reached  at  once.  The  first 
effect  of  the  tax  is  to  add  so  much  to  the  manufacturer's  expenses 
of  production.  He  will,  of  course,  desire  to  raise  his  price  so  as  to 
make  good  the  additional  expense.  In  strict  theory,  he  cannot  do 
so  except  in  consequence  of  a  decrease  in  supply.  Price  is  deter- 
mined directly  by  the  equilibrium  of  demand  and  supply  (or,  in 
more  technical  language,  by  marginal  vendibility),  and  it  will  not 
rise,  the  conditions  of  demand  remaining  the  same,  unless  supply  be 
lessened.  But  the  higher  expenses  of  production  and  diminished 
profits  will  tend  to  lessen  supply;  and  normal  equilibrium  will  be 
restored  when  the  manufacturers  are  again  getting  their  usual 
returns,  with  lessened  output  and  higher  prices.  Evidently  the 
extent  of  the  eventual  change  in  the  volume  of  output  depends  on 
the  elasticity  of  the  demand  for  the  article.  The  result  may  even 
be  reached,  under  some  not  improbable  circumstances,  without 
any  change  in  supply  at  all.  In  a  growing  country,  or  for  a  com- 
modity for  which  demand  is  growing,  there  may  be  no  actual  de- 
crease in  supply,  but  only  cessation  of  increase.  Demand  is  simply 
allowed  to  catch  up  with  the  new  situation. 

All  this  supposes  that  the  industry  i>  in  a  normal  :  tate  at  the 
time  when  the  tax  s  imposed  —  that  the  capitalists  engaged  in 
it  are  making  normal  profits,  and  will  be  led  to  lessen  their  output, 
some  of  them  perhaps  even  to  withdraw  enti  ely  if  their  profits 
are  cut  down.  It  is  perfectly  possible  that  a  tax  may  be  imposed 
at  a  time  when  an  industry  is  unusually  profitable.  Then  its 
incidence  may  be  apparently  on  the  producers  only;  they  may  be 
able  to  pay  the  tax  and  still  sell  to  consumers  at  the  ordinary 
profit.  Wliat  happens  in  such  cases  is  not  that  the  consumers  pay  a 
higher  price,  but  that  they  are  prevented  from  getting  the  lower 
price  which  competition  would  eventually  have  brought  about. 
This  process  is  of  course  much  more  convenient  to  the  producers 


71-§3]  TAXES  ON  COMMODITIES  555 

than  that  of  imposing  a  tax  when  an  industry  is  in  its  normal  state ; 
obviously  it  constitutes  no  real  exception  to  the  rule  that  the  tax 
eventually  falls  on  the  consume  r. 

Some  industries  are  so  much  of  an  aleatory  sort  that  the  work- 
ing of  competition,  and  therefore  of  taxes,  is  irregular  and  uncer- 
tain. This  seems  to  be  in  no  small  degree  the  situation  with  brew- 
eries, which  depend  for  the  sale  of  their  product  very  much  on 
reputation,  trade  ma  k,  and  the  control  of  dramshops.  A  brew- 
ery is  apt  to  be  either  a  highly  profitable  enterprise  or  a  disastrously 
losing  one;  much  as  is  the  alternative  in  the  case  of  a  large  hotel 
or  a  city  newspaper.  A  tax  on  beer  at  a  moderate  rate  is  likely  to 
be  swallowed  up  in  the  oscillations  of  brewery  expenses  and  profits 
and  to  have  hardly  a  noticeable  effect  on  the  retail  price  of  the 
brewerage.  Similarly,  a  reduction  in  an  existing  tax  may  simply 
lessen  the  brewer's  expenses  by  so  much,  and  not  affect  the  retail 
price.  Evidently  this  would  be  true  only  of  moderate  charges.  A 
large  increase  or  decrease  of  tax  would  be  felt  by  the  consumer  with- 
out question.  And  even  moderate  charges  would  necessarily  show 
their  effects  in  time,  tho  very  likely  not  so  much  in  altered  retail 
prices  as  in  a  decrease  or  increase  (as  the  case  may  be)  of  the  cus- 
tomary contents  of  the  glass,  or  in  a  better  or  worse  quality  of  the 
contents.  Here,  as  in  almost  all  economic  phenomena,  we  have  to 
deal  with  tendencies  that  work  out  their  results  more  or  less  slowly, 
and  in  ways  often  obscure.  It  is  to  be  said,  however,  that  taxes 
work  out  their  effects  on  prices  more  quickly  and  surely  than  some 
other  influences,  such  as,  for  example,  improvements  in  production 
or  deficiencies  in  the  supply  of  materials;  since  taxes  are  notorious 
and  the  attention  of  all  p  oducers  and  dealers  is  at  once  fastened 
on  them. 

§  3.  Consider  now  some  other  cases,  less  simple.  The  taxed 
commodities  may  be  produced  under  the  conditions,  not  of  con- 
stant returns,  bu  under  those  of  increasing  or  of  diminishing 
returns;  or  they  may  be  subject  to  a  monopoly. 

The  strict  theory  of  these  cases,  again,  is  comparatively  easy  to 
work  out,  being  only  an  application  of  the  general  theory  of  value.^ 

1  See  the  statement  of  this  theory  in  Chapters  12,  13,  14,  15. 


556  TAXATION  [71- §3 

A  tax  on  a  commodity  produced  under  diminishing  returns  may 
not  raise  its  price  by  the  full  amount  of  the  tax.  A  rise  in  price 
can  come  only  with  a  decline  in  quantity  produced.  But  in  the 
case  of  diminishing  returns  a  decline  in  quantity  produced  means  a 
recession  of  the  margin  of  cultivation,  and  a  lowering  of  marginal 
cost.  The  effect  of  the  tax  in  raising  normal  price  is  therefore 
partly  offset  by  the  lower  cost  due  to  less  pressure  on  the  sources 
of  supply.  Conversely,  a  tax  on  a  commodity  produced  under 
increasing  returns  may  not  only  raise  its  price,  but  raise  it  by 
more  than  the  amount  of  the  tax.  In  this  case  the  rise  in  price, 
by  checking  consumption  and  lessening  the  amount  produced, 
causes  the  cost  per  unit  to  advance,  and  so  the  price  to  rise  still 
further.  The  same  sort  of  reasoning  may  be  applied  to  the  re- 
mission of  an  existing  tax.  Where  the  remission  is  on  a  com- 
modity produced  under  diminishing  returns,  it  is  likely  to  in- 
crease consumption,  to  bring  pressure  to  bear  on  the  sources  of 
supply,  to  raise  marginal  cost,  and  so  to  lower  price  by  less  than  the 
amount  of  the  tax  remitted.  On  the  other  hand,  a  tax  remitted 
under  increasing  returns,  by  stimulating  consumption  and  output, 
is  likely  to  cause  a  decline  in  cost  per  unit,  and  so  a  fall  in  price 
greater  than  the  mere  remission  alone  would  have  brought  about. 

A  tax  on  a  monopolized  article  —  to  pursue  the  theory  of  these 
cases  —  is  not  shifted  under  the  same  influences  and  probably  not 
to  the  same  degree  as  a  tax  on  an  article  produced  under  free  com- 
petition. A  tax  directly  on  monopoly  profits  cannot  be  shifted 
at  all,  just  as  a  tax  on  economic  rent  cannot  be  shifted  at  all.  The 
monopolist  presumably  will  have  adjusted  his  output  in  such  a 
way  as  to  secure  the  maximum  profit,  just  as  the  owner  of  an  ad- 
vantageous plot  of  land  presumably  will  have  got  the  maximum 
rent;  and  a  tax  levied  directly  on  monopoly  profits  or  on  rent  does 
not  open  any  possibility  of  adjusting  matters  in  a  more  lucrative 
way.  The  monopolist  or  landowner  must  bear  the  tax  with  the 
best  grace  he  can. 

A  tax  on  a  monopolized  commodity,  however,  is  not  the  same  as 
one  on  monopoly  profits.  It  is  a  tax  per  unit  of  output,  not  on  the 
net  monopoly  gains.     The  tax  on  the  commodity  is  much  easier 


71- §3]  TAXES  ON  COMMODITIES  557 

to  levy,  since  it  is  comparatively  simple  to  ascertain  what  the  out- 
put is.  It  is  very  difficult  indeed  to  measure  monopoly  profits 
with  accuracy  and  correspondingly  difficult  to  assess  a  tax  simply 
on  the  monopoly  gains.  The  tax  on  the  monopolized  commodity, 
however,  tho  simple  and  comparatively  certain  in  its  financial  out- 
come, is  much  more  uncertain  in  its  eventual  result  on  prices.  It 
affects  at  once  all  the  calculations  of  the  monopolist.  His  expenses 
of  production  per  unit  rise.  If  he  tries  to  raise  his  price  correspond- 
ingly, he  will  almost  surely  have  to  face  a  decline  in  consumption. 
If  demand  is  elastic,  this  decline  in  consumption  may  be  consider- 
able, and  he  is  likely  to  shoulder  the  tax  in  good  part  {i.e.  not  raise 
his  price  by  the  full  amount  of  the  tax)  rather  than  incur  the  de- 
cline in  profit  from  a  lessening  of  sales.  If  the  demand  is  inelastic, 
that  is,  if  a  rise  in  price  checks  his  sales  but  little,  he  is  more  likely 
to  be  able  to  shift  a  large  part  of  the  tax  on  the  consumers. 

Theoretic  reasoning  on  this  topic  may  be  easily  pushed  further 
still.  The  monopolist  may  be  conducting  his  business  under  con- 
stant returns,  or  diminishing  returns,  or  increasing  returns.  His 
calculations  will  be  accordingly  affected.  If  he  is  producing  under 
diminishing  returns,  a  tax  and  a  rise  in  price  and  a  check  on  con- 
sumption will  be  less  unwelcome  to  him;  since  with  a  lessened 
quantity  he  will  also  have  lessened  costs.  If,  on  the  other  hand, 
he  is  producing  under  increasing  returns,  a  rise  in  price  and  a  con- 
sequent decline  in  consumption  and  output  will  be  very  unwel- 
come to  him;  since  it  will  bring  an  increase  in  his  cost  per  unit.  If 
we  suppose  him  to  be  quite  unfettered  in  his  monopoly,  rigorously 
determined  on  the  extraction  of  the  utmost  profit  possible,  and 
thoroly  informed  both  as  to  the  conditions  of  demand  and  his  own 
increasing  or  diminishing  costs  —  then  he  has  a  very  pretty  prob- 
lem before  him  in  readjusting  his  supply  and  his  price  after  the  im- 
position of  the  tax.  He  may  be  supposed  to  call  mathematical 
formulae  to  his  aid,  and  to  work  out  with  exactness  how  far  it  will 
be  to  his  advantage  to  submit  to  some  part  of  the  tax,  how  far  to 
shift  part  of  it  to  consumers. 

The  very  statement  of  this  last  case  points  to  an  important 
limitation  on  the  pertinence  of  all  such  analysis.   There  is  <    nger  of 


558  TAXATION  [71- §4 

making  an  intellectual  plaything  out  of  intricate  reasoning  on  the 
play  of  demand,  varying  costs,  taxes,  and  the  like.  Some  econo- 
mists have  given  no  small  share  of  attention  to  problems  of  this 
kind,  forgetting  that  their  reasoning  is  purely  hypothetical  and  that 
there  is  little  that  corresponds  to  it  in  the  concrete  facts  of  life. 
All  economic  principles  hold  good  only  in  the  rough.  Semi-math- 
ematical reasoning,  even  pure  mathematical  reasoning,  not  in- 
frequently aids  in  bringing  out  with  clearness  the  underlying  prin- 
ciples; but  it  can  rarely  be  pushed  with  advantage  into  details.  It 
cannot  be  so  pushed  with  reference  to  the  incidence  of  taxes  — 
neither  as  regards  the  modification  of  incidence  due  to  increasing 
or  diminishing  returns,  nor  as  regards  the  effect  of  taxes  on  mo- 
nopolized articles.  Increasing  or  diminishing  returns  show 
themselves  slowly  and  irregularly,  and  over  long  periods. 
Taxes  on  commodities  affected  by  these  varying  conditions 
are  maintained  only  in  very  few  cases,  if  in  any,  at  a  uniform 
high  rate  for  so  long  a  time  as  to  influence  sensibly  marginal  cost. 
For  most  practical  purposes,  we  may  content  ourselves  with  the 
simple  result  reached  at  the  outset,  under  the  supposition  of  con- 
stant returns  —  a  tax  on  a  commodity  tends  to  be  shifted  to  the 
consumer  by  its  full  amount.  And  in  the  same  way  we  can  dis- 
miss most  of  the  complicated  reasoning  about  the  working  of  taxes 
on  those  commodities  which  are  commonly  spoken  of  as  monopo- 
lized. It  has  been  noted  elsewhere  ^  that  complete  monopoly  is 
rare.  Those  cases  in  which  monopoly  is  supposed  to  exist  are 
almost  invariably  much  limited  —  limited  by  substitutes,  by  po- 
tential competition,  by  public  opinion,  by  force  of  law.  A  tax  on 
commodities  produced  by  a  quasi-monopoly  is  not  shifted  with  the 
same  certainty  as  one  upon  a  competitive  article;  but  there  is  a 
strong  probability  that  most  of  the  tax  will  be  shifted  in  the  same 
way.  This  sort  of  rough  and  general  conclusion  is  alone  in  accord- 
ance with  the  usual  state  of  the  facts;  and  it  suffices  for  the  guidance 
of  the  legislator. 

§  4.   Taxes  on  imports  present  no  peculiarities,  so  far  as  taxa- 
tion proper  is  concerned.    They  are  simply  one  form  of  taxes  on 

1  See  Chapter  15,  §  6. 


71- §5]  TAXES  ON  COMMODITIES  559 

commodities,  and  what  has  been  said  in  the  preceding  sections 
applies  to  them.  They  are  commonly  shifted  to  the  consumer, 
and  are  meant  to  be  so  shifted.  In  the  controversy  about  pro- 
tection, zealous  advocates  of  high  duties  are  led  occasionally  to 
maintain  that  taxes  on  imports  are  borne,  not  by  the  domestic  con- 
sumer, but  by  the  foreign  producer.  This  may  sometimes  be  the 
case,  just  as  it  is  sometimes  the  case  that  an  internal  tax  is  borne 
for  a  longer  or  shorter  period  by  the  producer,  and  not  the  con- 
sumer. Occasionally,  where  the  producer  (domestic  or  foreign)  has 
a  monopoly,  he  may  bear  a  part  of  the  tax  —  conceivably  may 
bear  the  largest  part  of  it.  Sometimes  he  seems  to  bear  it,  tho  he 
does  not  do  so  in  fact.  He  sells  the  commodity  at  the  same  nom- 
inal price,  but  with  shorter  measure  or  poorer  quality.  Most  often 
of  all,  the  same  unconcealed  and  simple  result  ensues  both  from 
internal  taxes  and  customs  duties  —  the  commodity  rises  in  price 
by  the  full  amount  of  the  tax. 

The  peculiarity  of  duties  on  imports  is  merely  that  they  may 
bring  into  the  market  a  rival  untaxed  supply.  Levied  strictly 
with  a  view  to  their  effect  as  taxes,  import  duties  should  always  be 
accompanied  by  internal  taxes  at  the  same  rates  on  the  same  com- 
modities. If  this  is  not  done,  domestic  production  may  spring  up, 
even  tho  the  domestic  producers  cannot  bring  the  article  to  market 
at  as  low  a  price  as  it  could  be  imported  for,  in  the  absence  of  the 
duties.  Whether  such  a  stimulation  of  domestic  production  is 
wise  or  not,  raises  the  whole  question,  sufficiently  discussed  else- 
where, of  the  effects  of  protective  duties.^ 

§  5.  Tho  the  consumer  almost  always  pays  taxes  on  commod- 
ities, he  is  commonly  little  aware  of  it.  The  tax  is  paid  by  him  in 
the  form  of  a  higher  price.  Wlien  a  given  price  level  is  established 
for  any  commodity,  people  get  used  to  it  as  the  going  rate  and  pay 
without  grumbling.  If  every  purchaser  had  to  hand  out  directlj' 
two  cents  each  time  he  bought  a  pound  of  sugar,  or  was  called  on  to 
pay  a  tax  of  two  dollars  each  time  he  bought  a  suit  of  woolen 
clothes  (such  were  roughly  the  rates  at  which  American  consumers 
of  these  articles  were  taxed  for  half  a  century)  —  we  may  be  sure 

1  See  Chapters  36,  37. 


560  TAXATION  [71- §5 

that  a  mighty  protest  would  arise.  The  fact  that  such  taxes  are 
concealed  and  only  half  understood,  makes  them  tempting  for  the 
legislator.  He  is  constantly  confronted  by  demand  for  heavier 
outlay,  and  yet  finds  the  public  willingness  to  bear  new  burdens 
lagging  behind  its  demand  for  greater  public  se  vices.  He  is  likely 
to  turn  to  the  taxes  which  wi  1  yield  the  largest  revenue  with  the 
least  protest.     Such  are  taxes  on  commodities. 

Obviously  commodities  which  are  produced  in  the  greatest 
quantities  are  those  likely  to  yield  the  largest  revenue;  and  these 
again  are  likely  to  be  commodities  consumed  in  larger  proportion 
b}"  the  poor  than  by  the  rich.  Hence  most  taxes  on  commodities 
tend  to  be  not  even  proportional;  they  are  regressive.  A  poor  man 
will  not  purchase  as  much  sugar  as  a  rich  one;  but  he  will  spend  a 
larger  share  of  his  income  on  sugar;  and  a  tax  on  such  a  commodity 
bears  more  heavily  on  him.  It  is  doubtless  not  impossible  to 
select  for  taxation  commodities  used  chiefly  by  the  well-to-do  and 
the  rich,  such  as  laces  and  champagnes.  But  taxes  of  this  kind 
are  rarely  productive  of  much  revenue.  The  very  fact  that  a 
person  is  rich  brings  it  about  that  he  distributes  his  expenditure 
over  many  things,  and  buys  and  consumes  comparatively  little  of 
any  one  thing.  Taxes  on  luxurious  articles  hence  are  likely  to 
yield  only  driblets  of  revenue  and  to  be  expensive  of  administra- 
tion. The  lucrative  revenue-yielders  are  the  staples  consumed 
in  great  amounts,  and  consumed  chiefly  by  the  masses.  Such  are, 
to  mention  articles  now  much  taxed  in  civilized  countries,  sugar, 
tea,  coffee,  petroleum,  tobacco,  beer,  wine,  spirits.  On  these,  to 
repeat,  the  taxes  are  commonly  regressive. 

Two  sets  of  articles  among  those  just  mentioned  are  usually  sub- 
jected to  taxes,  whether  excise  or  customs,  at  an  especially  high 
rate  —  alcoholic  1  quors  and  tobacco.  It  is  supposed  that  a  decline 
in  their  consumption  is  to  be  desired  rather  >han  regretted,  and 
that  taxes  may  be  imposed  on  hem  without  compunction.  This 
attitude,  to  be  sure,  does  not  go  far  to  explain  the  taxation  of  to- 
bacco, nor  that  of  wine  and  beer  on  the  Continent  of  Europe,  where 
these  beverages  are  universal^  used  and  not  greatly  abused.  Sim- 
ple fiscal  convenience  is  the  main  factor.     For  whatever  reason. 


71- §5]  TAXES  ON  COMMODITIES  561 

large  revenues  are  secured  in  almost  every  civilized  country  from 
such  taxes.  They  are  made  to  yield  probably  the  very  largest 
revenue  by  creating  fiscal  monopolies.  That  is,  governments 
undertake  their  manufacture,  or  at  least  their  sale  at  wholesale  or 
retail,  and  prohibit  all  individuals  from  engaging  in  the  business 
thus  appropriated.  Prices  are  charged  to  purchasers  which  are  so 
high  as  to  bring  'arge  profits;  the  result  for  consumers  being  the 
same,  tho  reached  by  a  different  process,  as  that  of  taxing  the 
commodities  in  the  ordinary  ways.  Tobacco  is  a  fiscal  monopoly 
in  France,  Italy,  Austria,  Spain,  and  other  countries.  Spirits  are 
a  fiscal  monopoly  in  Russia  and  Switzerland.  Salt  is  a  fiscal  mo- 
nopoly in  Austria  and  Italy.  The  method  has  the  advantage  that 
evasion  is  easily  detected ;  the  very  fact  that  any  private  individual 
conducts  the  business  at  all  is  proof  that  he  violates  the  revenue 
law.  On  the  othe '  hand,  the  system  is  open  to  all  the  objections 
to  bureaucratic  administration,  and  in  particular  is  the  more 
unsuitable  as  the  civil  service  is  ill  organized  and  the  general 
tone  of  public  administration  is  lax. 

Customs  duties  are  made  more  easily  applicable  to  a  large  and 
varied  list  of  articles  than  excise  taxes.  Supervision  need  not 
extend  over  the  whole  land ;  it  can  be  limited  to  the  ports  of  entry 
into  the  country.  This  circumstance  goes  far  to  explain  the  wide 
prevalence  of  protective  duties.  They  are  a  convenient  way  of 
getting  revenue.  Once  adopted  for  revenue,  their  incidental 
effects  on  the  course  of  domestic  industry  are  at  first  overlooked, 
and  then,  when  they  have  established  themselves,  are  welcomed. 
The  list  of  articles  on  which  customs  duties  are  levied  in  the  United 
States  is  an  extraordinarily  wide  one,  covering  some  1500  different 
things.  It  would  be  out  of  the  question  to  le\y  excise  taxes  on  any 
such  list. 

In  fairness,  it  is  to  be  said  of  the  customs  duties  in  the  United 
States,  as  they  developed  under  the  extreme  protectionist  system 
so  long  maintained,  that  their  incidence  was  not  so  c  early  bad  as 
is  commonly  the  case  with  excises.  Tea,  coffee,  cocoa,  were  free 
of  duty.  Sugar  was  the  only  dutiable  article  of  food  whose  taxa- 
tion was  clearly  regressive.     \Miat  was  true  of  sugar  was  probably 


562  TAXATION  [71-§  5 

true  also  of  wool,  the  duty  on  which  was  perhaps  the  most  objec- 
tionable of  all  the  protective  duties.  As  regards  manufactured 
commodities,  many  were  not  affected  by  the  duties,  directly  or 
indirectly.  The  commoner  grades  of  cotton  goods,  for  example, 
are  produced  as  cheaply  within  the  country  as  abroad;  they  would 
not  be  imported  in  any  case;  duties  on  them,  tho  they  stand  on 
the  statute  book,  are  merely  nominal.  The  finer  grades  of  cotton 
fabrics  are  largely  imported,  or  made  within  the  country  under 
the  shelter  of  the  duties.  The  prices  of  these  are  raised  by  duties, 
and  a  real  tax  is  imposed  on  consumers.  But  the  consumers  are, 
if  not  wholly,  at  least  to  a  great  degree,  the  well-to-do  and  rich,  and 
the  tax  is  in  so  far  not  open  to  the  objection  of  bearing  with  special 
weight  on  persons  of  small  means.  The  same  is  probably  true  of 
duties  on  other  textiles,  such  as  woolens  and  silks;  tho  as  to  these 
it  is  not  so  clear  that  duties  on  the  cheaper  qualities  are  merely 
nominal.  The  main  objection  against  our  regime  of  high  protec- 
tion was  not  so  much  that  it  caused  disproportionate  burdens  on 
those  least  able  to  pay,  as  that  it  gave  a  disadvantageous  direction 
to  the  productive  energies  of  the  community. 

References  on  Book  VIII 

C.  F.  Bastable,  Public  Finance  (3d  ed.,  1903),  covers  the  whole  field 
and  is  able  and  well-judged,  tho  not  attractively  written.  Among  foreign 
books,  K.  T.  Eheberg,  Finanzwissenschaft  (new  ed.,  1912),  is  a  good  book 
of  the  German  type;  and  P.  Leroy-Beaulieu,  Science  des  Finances  (new  ed., 
1912),  is  an  able  French  book,  full  of  good  sense  and  information,  but  not 
strong  on  questions  of  principle.  An  excellent  set  of  selections,  covering 
the  main  problems,  is  C.  J.  Bullock,  Selected  Readings  in  Public  Finance 
(1920).  On  progression,  the  view  presented  in  Chapter  68  is  similar  to 
that  of  A.  Wagner,  Finanzwissenschaft,  Vol.  II,  §  158  seq.  (ed.  of  1890),  and 
is  different  from  that  in  E.  R.  A.  Seligman's  Progressive  Taxation  in  Theory 
and  Practice  (new  ed.,  1908).  The  last-named  writer's  Income  Tax  (1914) 
is  a  valuable  survey  of  legislation  and  experience. 


INDEX 


INDEX 


(Reference  should  also  be  made  to  the  analytical  Table  of  Contents.) 


Ability,    differences    of,    ii,    138,    169,    Australia,  gold  discoveries  in,  i,  255, 


265,  477. 

"Ability"  principle  of  taxation,  ii,  510. 

Abstinence  in  relation  to  interest,  ii, 
48 ;  under  socialism,  ii,  482. 

Accident,  insurance  against,  ii,  353 ; 
bad  legal  situation  in  United  States, 
ii,  362. 

Acworth,  W.  M.,  ii,  501. 

Advances  to  laborers,  in  relation  to 
capital,  i,  75. 

Advertising,  and  large-scale  produc- 
tion, i,  53,  65 ;  how  far  serves  a 
good  purpose,  i,  20,  ii,  450. 

Aftalion,  A.,  i,  443. 

Agrarstaat,  argument  for  in  Germany, 
i,  533. 

Agricultural  implements,  statistics  on 
manufacture,  i,  49. 

Agricultural  land,  incidence  of  taxes 
on,  ii,  541. 

Agriculture,  no  tendency  to  large-scale 
production,  i,  55 ;  subject  to  dimin- 
ishing returns,  i,  183 ;  cooperation 
in,  ii,  380,  381 ;  position  under  so- 
cialism, ii,  468. 

American  specie,  in  sixteenth  century, 
i,  244,  253. 

American  Sugar  Refining  Company, 
see  Sugar. 

American  Tobacco  CompanJ^  i,  62, 
ii.  410,  450. 

Anderson,  B.  M.,  Jr.,  i,  442. 

Andrews,  J.  B.,  ii,  385. 

Anthracite  coal,  tendencj^  to  over- 
production, ii,  59 ;  diminishing  re- 
turns in  mines,  ii,  101. 

Apprenticeship,  obsolete,  i,  98. 

Arbitration,  see  Contents,  ch.  59. 

Arkwright,  i,  34. 

Army  and  Na\'y'  Stores,  ii,  373. 

Ashley,  W.  J.,  i.  545. 

Assignats,  i.  307,  320. 

Astor.  J.  J.,  ii,  105. 

Atkinson,  F.  J.,  i,  244. 


272,  432 ;  effects  on  foreign  ex- 
changes, i,  473  ;  labor  legislation  in, 
ii,  334,  348  ;  old-age  pensions,  ii,  360 ; 
railways,  ii,  434. 

Austria,  resumption  of  specie  pay- 
ments, i,  314,  317. 

Axes,  conventional,  used  as  monej',  i, 
226. 

Babbage,  C,  i,  105. 

"Back-loading,"  analogy  to  joint  cost, 

ii,  405. 
Bagehot,  W.,  i,  442. 
Bailey,  ii,  232. 
Bank  Act  of  1844  (England),  i,  359, 

406. 
Bank  notes,  see  Contents,  chs.  24  to  27  ; 

effect  of  small  denominations,  i,  329, 

424. 
Bank  of  England,  description  of,  i,  359  ; 

policj-  of,  during  crises,  i,  362,  404, 

410,  422  ;  how  gold  bullion  provided, 

i,   451 ;     policy   during  Great  War, 

i,  368. 
Bank   of   France,    notes   inconvertible 

yet    not    depreciated,    i,    315,    356; 

description  of,  i,  355. 
Bank  of  Germany,  see  Reichsbank. 
Barbour,  D.,  i,  442. 
Barings,  i,  89,  326,  404. 
Barnett,  G.  E.,  ii,  385. 
Barter,  i,  110. 

Bastable,  C.  F.,  i,  544,  ii,  562. 
Batchelder,  ii,  172. 
Bedford,  Duke  of,  ii,  94,  105. 
Bedford  level,  ii,  77. 
Bellamy,  ii,  476. 
Berlin,  birthrates  in  different  quarters, 

ii,  242. 
Bernstein,  ii,  498. 
Bertillon,  ii,  232,  243. 
Bessemer,  i,  194.  ii,  114. 
Beveridge,  W.  H.,  ii,  385. 
Bigelow,  ii,  172. 


565 


566 


INDEX 


Bill  brokers  in  England,  i,  344. 

Bill  of  exchange,  i,  417,  448. 

"Billon"  coins,  i,  268. 

Bimetallism,  see  Contents,  chs.  20,  21. 

Birthrates,  general  statement,  ii,  226 ; 

figures  for  various  countries,  ii,  231  ; 

for  United  States,  ii,  234  ;  for  Massa- 
chusetts, ii,  235  ;    general  decline  in 

nineteenth    century,    ii,    239,    245 ; 

differences   between  rich  and  poor, 

ii,   241 ;     between  native   born   and 

foreign  born,  ii,  243,  247. 
Bland-Allison  Act,  i,  277. 
Bohm-Bawerk,  ii,  9,  14,  44,  277,  502. 
Bonanza  farming,  i,  55. 
Bonanza  mines  of  Nevada,  ii,  99. 
Bonar,  J.,  ii,  278. 
Booth,  Charles,  ii,  256. 
Boots  and  shoes,  exported  from  United. 

States,  i,  541. 
Boston,  birthrates  in  different  quarters, 

ii,  243. 
Boulton,  ii,  172,  424. 
Bowley,  A.  L.,  ii,  255,  258. 
Branch  banking,  i,  367,  376. 
Brassey,  ii,  425. 
Brentano,  L.,  i,  545. 
Breweries,  in  relation  to  taxation,  ii 

555. 
Briggs  collieries,  ii,  336. 
Brokers,   productive  or  unproductive, 

i,  26. 
Brown,  H.  G.,  i,  544. 
Biicher,  i,  51,  105. 
Bullock,  C.  J.,  ii,  562. 
Business  leadership,  effect  on  industrial 

efficiency,  i,  100. 
Business  profits,  see  Contents,  chs.  49, 

50 ;   how  affected  by  rising  prices,  i, 

297. 
Butcher's  trade,  in  relation  to  division 

of  labor,  i,  42. 
"By-products,"     utilization    in    large 

establishments,  i,  54 ;    explained,  i, 

215. 

Cairnes,  ii,  141. 

California,  gold  discoveries  in,  i,  255, 
272,  432 ;  paper  money  fails  to  circu- 
late in,  i,  306 ;  effects  of  gold  pro- 
duction on  foreign  exchanges,  i,  473. 

Call  loans,  fluctuations  in  rates,  i,  347. 

Caloric  engine,  ii,  172. 

Canada,  banking  system,  i,  384  ;  trade 
with  United  States,  i,  477,  509. 

Capital,  see  Contents,  chs.  5,  38-40, 
46 ;  moral  and  intellectual,  i,  103 ; 
not  created  by  banks,  i,  351 ;    "capi- 


tal" to  the  individual,  ii,  5 ;  produc- 
ti\dty  of,  ii,  11;  marginal  produc- 
tivity of,  ii,  12 ;  intention  of  the 
owner  and  making  of  capital,  ii,  21, 
22 ;  definition  of,  ii,  43 ;  sometimes 
classified  as  artificial  and  natural, 
ii,  125 ;  how  accumulated  under 
socialism,  ii,  481. 

Capital  goods,  ii,  6 ;  how  influenced  in 
value  by  marginal  vendibility,  i,  148. 

"Capitalistic"  production,  ii,  10. 

Carlton,  F.  T.,  ii,  385. 

Carnegie,  i,  58. 

Carter,  G.  R.,  i,  105. 

Carver,  T.  N.,  ii,  14,  277. 

Cassel,  G.,  ii,  277. 

Cattle,  a  medium  of  exchange,  i,  110. 

Central  bank,  able  to  mitigate  crises, 
i,  403 ;  how  far  protects  specie 
holdings,  i,  458. 

Central  reserve  cities,  i,  379. 

"Charging  what  the  traffic  will  bear," 
ii,  396,  418. 

Check,  legal  position  of  payee,  i,  384. 

Chevalier,  i,  302. 

Chicago  Board  of  Trade,  clearing  sys- 
tem, i,  418. 

Children,  high  death  rate,  ii,  232. 

China,  silver  bullion  as  money  in,  i, 
227 ;  jnerchants'  notes  as  money,  i, 
417. 

Chinese,  exclusion  from  United  States, 
how  justified,  ii,  146. 

Church,  ii,  172. 

Civil  Service  Supply  Association,  ii, 
373. 

Clare,  G.,  i,  544. 

Clark,  J.  B.,  ii,  13,  14,  126,  278. 

Clark,  V.  S.,  ii,  348,  385. 

Clearing-house  certificates,  i,  409. 

Clearing  houses,  i,  335 ;  connection 
with  theorj'  of  prices,  i,  418. 

Closed  shop,  ii,  304,  310. 

Coffee,  see  Tea. 

Coinage,  explained,  i,  113,  226. 

Cold  storage,  effect  on  conditions  of 
supply,  i,  142,  158. 

Cole,  G.  D.  H.,  ii,  502. 

Collective  bargaining,  ii,  312. 

Colson,  C,  ii,  501. 

Combination,  horizontal  and  vertical 
i,  59,  60. 

Commercial  banks,  i,  325,  327,  398. 

Commons,  J.  R.,  i,  42,  ii,  385. 

Communistic  societies,  ii,  465. 

Comparative  cost,  doctrine  of,  i,  481. 

Competition,  its  efficacy  important  for 
the  classification  of  capital,  ii,  127. 


INDEX 


667 


Competitive  margin  for  capital,  ii,  26. 

Comte,  A.,  ii,  466. 

Comptoir  d'Escompte,  i,  390,  404. 

Compulsory  arbitration,  ii,  348. 

Constant  cost,  i,  170 ;  effect  of  taxes 
on  commodities  under,  ii,  554. 

Constitutional  limitations,  on  labor 
legislation,  ii,  325  ;  on  income  taxes, 
ii,  529. 

Consumer's  capital  (consumer's 
wealth)  not  commonly  regarded  as 
capital,  ii,  5 ;  how  it  yields  interest, 
ii,  40-43. 

Consumer's  surplus,  i,  124. 

"Continental"  paper  money,  i,  307. 

Continuous  demand,  i,  137. 

Convertible  government  paper,  i,  317. 

Cooke  (Jay)  and  Company,  i,  391,  400 

Cooperation,  see  Contents,  ch.  61 ; 
also  ii,  297,  472. 

Copper,  corner  of  1888,  i,  213 ;  suc- 
cessive discovery  of  mines,  ii,  101. 

Copyright  books,  illustrate  monopoly 
value  under  decreasing  cost,  i,  203, 
205 ;  a  qualified  monopoly,  i,  209 ; 
justification  of,  ii,  115. 

Corner,  operations  analyzed,  i,  210. 

Corporations,  sec  Contents,  ch.  6 ; 
honesty  of  management,  i,  88 ;  con- 
nection with  crises,  i,  397 ;  see  also 
"Public  service"  industries. 

Corporation  taxes.  Federal,  ii,  530. 

Cost  of  production,  in  what  sense  used, 
i,  169,  183,  ii,  153. 

Cotton,  fiber  and  seed  illustrate  joint 
cost,  i,  214,  216;  why  exported 
from  United  States,  i,  484. 

Cotton  goods,  statistics  on  manu- 
facture, i,  49  ;  effect  of  United  States 
duties,  ii,  562. 

Cotton  market  and  prices,  i,  145,  148. 

Craft  gilds,  i,  39. 

Credit,  use  of,  effect  on  prices,  i,  41f , 
417. 

Credit  Lyonnais,  i,  345. 

Crises,  see  Contents,  chs.  28,  29  ;  policy 
of  Bank  of  England  during,  i,  363, 
403  ;  periodicity  of,  i,  388  ;  sun  spot 
theorjr  of,  i,  389 ;  advantage  of  a 
central  bank  for  mitigating,  i,  403  ; 
possibly  mitigated  by  combinations, 
ii,  455. 

Crises  of  1857,  i,  390,  396,  402. 

Crisis  of  1873,  i,  390,  396,  408,  412; 
connected  with  railway  building,  i, 
395 ;  connected  with  international 
borrowing,  i,  470. 

Crisis  of  1893,  i,  389,  396,  408. 


Crisis  of  1907,  i,  389,  400,  409. 

Crompton,  i,  34. 

Crops,  connection  with  crises,  i,  395, 
396. 

"Crossing"  of  checks  in  England,  i, 
337. 

Cuban  sugar  lands,  predatory  cultiva- 
tion of,  ii,  73. 

Custom,  effect  on  retail  prices,  i,  150. 

Cutthroat  competition,  ii,  449, 451, 456. 

Dalton,  H.,  ii,  270,  278. 

Darwin,  C,  ii,  138,  226. 

Darwin,  L.,  i,  442,  ii,  502. 

Dawson,  M.,  ii,  385. 

Dawson,  W.  H.,  ii,  385. 

Death  rates,  general  statement,  ii, 
227 ;  figures  for  various  countries, 
ii,  231;  for  United  States,  ii,  235; 
for  Massachusetts,  ii,  235. 

De  Beers  Company,  i,  201. 

Demand  loans  by  banks,  i,  347,  348. 

Demand  curve,  i,  137. 

Denmark,  cooperation  in,  ii,  380. 

Depew,  town  of,  ii,  96. 

Depositors,  relation  to  banks,  i,  384, 
387. 

Deposits,  see  Contents,  chs.  24,  27,  30 ; 
relation  to  circulating  medium  and 
to  checks,  i,  334,  420. 

Depreciation  of  machinery  and  main- 
tenance of  capital,  i,  77. 

Derived  utility,  i,  148. 

Derived  value,  ii,  124. 

Dewey,  ii,  276. 

Dexterity,  how  far  cause,  how  far 
result  of  division  of  labor,  i,  31,  33. 

Diamonds,  in  relation  to  consumer's 
surplus,  i,  126 ;  illustrate  monopoly 
value,  i,  201,  204. 

Dickinson,  G.  L.,  ii,  502. 

Dietzel,  H.,  i,  545. 

Differences  of  wages,  see  Contents,  ch. 
47. 

Diminishing  returns,  relation  to  value, 
i,  182 ;  in  agriculture,  i,  183 ;  how 
far  in  gold  mining,  i,  259 ;  as  to 
capital,  ii,  14  ;  on  any  one  plot  of 
land,  ii,  66,  68 ;  on  urban  sites,  ii, 
87  ;  taxes  on  commodities  produced 
under,  ii,  556. 

Diminishing  utility,  principle  of,  i,  117. 

Direct  taxes,  relegated  to  local  bodies 
in  Prussia,  ii,  550 ;  economic  sense 
of,  ii,  552. 

Discharge,  right  of,  essential,  ii,  289, 
294,  309 ;  disappears  under  social- 
ism, ii,  486. 


568 


INDEX 


Discontinuous  demand,  i,  137. 

Discount  by  banks,  how  calculated,  i, 
332. 

Discounted  product  of  labor,  relation 
to  wages,  ii,  214. 

Dislocated  exchanges,  i,  463. 

Division  of  labor,  see  Contents,  ch.  3. 

Domestic  servants,  see  Servants. 

Double  standard,  i,  262. 

Double  taxation,  ii,  512. 

Dresdner  Bank,  i,  404. 

"Dry  farming,"  ii,  76. 

Dumont,  A.,  ii,  278. 

"Dumping,"  i,  207. 

Dunbar,  C.  F.,  i,  442. 

Dunn,  S.  O.,  ii,  502. 

Durand,  E.  D.,  ii,  502. 

Dutch  East  India  Company,  destruc- 
tion of  crop  by,  i,  200. 

Duties  on  imports,  fiscal  effects,  ii,  558, 
561 ;  see  also  Protection. 

Dwellings,  rental  of,  a  form  of  interest, 
ii,  40 ;  demand  possibly  discontinu- 
ous, i,  155 ;  incidence  of  taxes  on,  ii, 
542. 

Dyer,  ii,  172. 

Dynamic  state,  i,  172. 

Economic  area,  i,  40. 

Economic  goods,  i,  3,  5. 

"Economic  rent,"  ii,  6.3. 

Edgeworth,  F.  Y.,  i,  442,  544. 

Edison,  ii,  172. 

Education,  effect  on  efficiency,  i,  96 ; 
expense  of,  doubly  affects  wages,  ii, 
136. 

Egypt,  usury  in,  ii,  36. 

Eheberg,  K.  T.,  ii,  562. 

Eight-hour  day,  ii,  326. 

Einaudi,  L.,  ii,  102. 

Elastic  demand,  i,  137 ;  when  said  to 
be  unity,  i,  138,  139. 

Elasticity  of  bank  issues,  i,  358,  366 
375,  426. 

Emergency  currency,  i,  366 ;  (under 
Federal  Reserve  system),  i,  410. 

Emery,  H.  C,  i,  220. 

Employee  Representation,  ii,  295,  297. 

Employment  not  created  by  protec- 
tion, i,  510. 

England,  rate  of  interest  in  eighteenth 
century,  ii,  31 ;  see  also  Great  Brit- 
ain. 

Entrepreneur,  ii,  164. 

"Equal  pay  for  equal  work,"  ii,  151, 
316. 

Equality  of  sacrifice,  as  a  principle  of 
taxation,  ii,  511. 


Equalizing    cost   of    production,    as   a 

principle  of  protection,  i,  517. 
Equalizing  differences  of  wages,  ii,  132. 
Equation  of  supply  and  demand,  i,  141. 
Equilibrium  price,  i,  144,  146. 
Ericsson,  i,  41,  ii,  172. 
Erie  canal,  free  of  tolls,  ii,  391. 
Eugenics,  i,  103,  ii,  250. 
Excess  of  exports  from  United  States 

since   1873,  i,  474 ;    of  imports  till 

1873,  i,  474. 
Exchange  and  division  of  labor,  i,  38, 

110,  111. 
Exchanges,  how  developed,  i,  159. 
Excise,  ii,  553. 
Expenditure    on    luxuries,    effect    on 

wages,  ii,  209. 
Expenses  of  production,  in  what  sense 

used,  i,  169,  ii,  153. 
Extensive  cultivation,  ii,  75. 
External  economies,  i,  189. 

Factory  Acts,  ii,  320. 

''Faculty"  principle  of  taxation,  ii,  510. 

"Fair  price,"  i,  153. 

"Fair  wages,"  ii,  .345. 

"Favorable  balance  of  trade,"  i,   475. 

Fawcett,  H.,  i,  544. 

Fay,  C.  R.,  ii,  385. 

Federal  incorporation,  ii,  459. 

Federal  Reserve  Banks,  i,  376,  381, 
426. 

Federal  Reserve  system,  see  Contents, 
ch.  27 ;  administration,  i,  376,  377 ; 
note  issue,  i,  377,  378 ;  reserve  re- 
quirements, i,  379,  380 ;  policy  during 
Great  War,  i,  381 ;  as  preventive  of 
panics,  i,  410. 

Federal  Trade  Commission,  ii,  462 

Fetter,  ii,  278. 

Fiat  money,  i,  304. 

Final  utility,  i,  121. 

"Fiscal"  principle  of  taxation,  ii,  508. 

Fiscal  monopoly,  i,  208. 

Fisher,  I.,  i,  442,  ii,  126,  277. 

Fitch,  ii,  309. 

Fixed  prices  (retail),  advantages  of,  i, 
152. 

Flour  milling,  how  affected  by  dealings 
in  futures,  i,  159. 

Foreign  exchanges,  see  Contents,  ch.  32. 

Forests,  varjdng  conditions  of  supply,  i, 
184. 

Fortunes,  great,  see  Contents,  ch.  51 ; 
easily  maintained  in  modern  times, 
i,  90 ;  causes  of,  ii,  200. 

France,  cooperative  production  in,  ii, 
382 ;   preventive  check  in,  ii,  234. 


INDEX 


569 


"Franchise,"  ii,  408. 

Frankel,  L.  F.,  ii,  385. 

Free  goods,  i,  3,  5. 

Free  trade,  see  Contents,  chs.  36,  37 ; 
summary  statement  of  main  argu- 
ment, i,  507. 

Freight  charges,  effects  on  imports  and 
exports,  i,  472. 

Freight  classification  on  railways,  ii, 
397. 

French  peasantry,  hoarding  by,  i,  74. 

Friendly  societies,  ii,  357. 

Fulton,  i,  35. 

Funded  incomes,  to  be  taxed  at  higher 
rates,  ii,  512. 

Futures,  speculation  in,  i,  159,  163. 

Gary,  town  of,  ii,  96. 

General  property  tax,  ii,  550. 

Geographical  division  of  labor,  i,  493 ; 
how  affected  by  railways,  ii,  389, 
399. 

Germany,  workmen's  insurance  in,  see 
Contents,  ch.  60 ;  growth  of  large- 
scale  production,  i,  51. 

Ghent  system  of  unemployed  benefit, 
ii,  367. 

Glasgow  bank  failure,  i,  84. 

Glass  blowers'  union,  i,  521 ;  in  rela- 
tion to  marginal  utility,  ii,  156 ; 
former  monopoly  position,  ii,  302. 

Godin  metal-working  establishment,  ii, 
337. 

Gold,  articles  made  of,  how  affected 
by  rising  and  falling  prices,  i, 
240. 

Gold  and  silver,  how  fitted  for  medium 
cf  exchange,  i,  111,  224;  industrial 
consumption  of,  i,  239,  240 ;  how 
durability  affects  value,  i,  250  ;  pro- 
duction aleatory,  i,  250 ;  yet  less  so 
in  modern  times,  251 ;  how  far  sub- 
ject to  diminishing  returns,  i,  259 ; 
mining  countries  export  specie,  i, 
460,  473. 

Gold  redemption  fund.  Act  of  1900,  i, 
318. 

Goldsmiths,  the  first  London  bankers, 
i,  330. 

Gold  standard,  adopted  in  England,  i, 
270 ;  in  Germany,  i,  274  ;  stability 
of,  i,  321,  440,  ii,  112. 

Good  will,  effect  on  value,  i,  175. 

Goschen,  G.  J.,  i,  544. 

Gould,  J.,  ii,  414,  416. 

Government  employees,  high  pav  of, 
ii,  1.33,  430. 

"Government  stroke,"  ii,  430. 


Graebe,  i,  101. 

Great  Britain,  and  geographical  di\'i- 
sion  of  labor,  i,  43,  44 ;  system  of 
customs  duties,  i,  519 ;  contempo- 
rary tariff  controversy  in,  i,  536 ; 
investments  in  foreign  countries,  i, 
470 ;  international  trade  illustrated, 
i,  494 ;  distribution  of  incomes,  ii, 
255  ;  of  property,  ii,  257  ;  causes  of 
success  in  cooperation,  ii,  373,  382 ; 
income  tax  system,  ii,  522  ;  inherit- 
ance taxes,  ii,  534 ;  local  taxes, 
how  levied,  ii,  546. 

"Great  War,"  1914—18,  effect  on  prices 
in  United  States,  i,  287 ;  in  Euro- 
pean countries,  i,  320,  321 ;  silver 
certificates  in  United  States,  i,  278 ; 
paper  money  issues,  i,  320,  369  ;  part 
played  by  European  banks,  i,  367 ; 
Federal  Reserve  system,  i,  381 ;  effect 
on  foreign  exchanges,  i,  463 ;  in- 
terest rates,  ii,  38 ;  governmental 
control  of  railroads  in  United  States, 
ii,  438 ;  British  income  tax,  ii,  526, 
529 ;  taxation  in  United  States,  ii, 
531,  534. 

"Greenbacks,"  i,  318. 

Gresham's  law,  i,  265. 

Ground  rents  and  leases,  ii,  93. 

Griinzel,  J.,  i,  545. 

Guild  socialism,  ii.  471. 

Hamburg,  birthrates  in  different  quar- 
ters, ii,  242. 

Haney,  L.  H.,  ii,  502. 

Hargreaves,  i,  34. 

Harrison,  A.,  ii,  385. 

Hawtrey,  R.  G.,  i,  442. 

Hedging,  i,  159. 

Hedonism,  i,  132,  155,  ii,  273. 

Heilman,  R.  E.,  ii,  385. 

Helfferich,  i,  250,  442. 

Heredity,  i,  103. 

Herkner,  H.,  ii,  385,  502. 

Hill,  R.,  ii,  423. 

Hindustan,  usury  in,  ii,  36. 

Hoarding,  i,  73. 

Hobson,  J.  A.,  ii,  277. 

Holding  company,  ii,  443,  459. 

Holland,  rate  of  interest  in  eighteenth 
century,  ii,  31. 

Hollander,  J.  H.  ii,  385. 

Home  market  argument  for  protection, 
i,  509. 

Horizontal  combination,  i,  59,  191. 

Hours  of  labor,  regulation  of,  ii,  324 ; 
influence  of  shorter  hours  on  wages, 
ii,  327. 


570 


INDEX 


Hoxie,  R.  F.,  ii,  385. 
Hue,  i,  417. 

Hutchins,  B.  L.,  ii,  385. 
Hutchinson,  W.,  ii,  149. 

"Illegitimate"  profits,  ii,  195,  515. 

"Illegitimate"  speculation,  i,  163. 

Immigrants,  how  remittances  affect 
imports  and  exports,  i,  472 ;  low 
rates  of  wages,  i,  490,  ii,  145, 
248. 

Immobility  of  labor,  how  affects  inter- 
national trade,  i,  489 ;  influence 
on  bargaining  power  of  laborers,  ii, 
300. 

Income,  money  income  and  real  in- 
come, i,  130,  131 ;  income  of  a  com- 
munity, how  measured,  i,  129 : 
how  measure  a  farmer's  income,  ii, 
261;  "earned"  and  "unearned" 
incomes,  ii,  512,  526. 

Income  taxes,  see  Contents,  oh.  69. 

Inconvertible  paper  money,  see  Con- 
tents, ch.  23 ;  foreign  exchange 
under,  i,  463. 

Increasing  returns,  see  Contents,  ch. 
14;  on  railways,  ii,  393;  effect  of 
taxes  on  commodities  produced 
under,  ii,  555. 

Increment  taxes,  ii,  108 ;  in  Germany 
and  Great  Britain,  ii,  112;  modes 
of  levjdng,  ii,  108. 

Indestructible  powers  of  the  soil,  ii, 
73,  75. 

Index  numbers,  explained,  i,  286 ; 
arithmetic  mean,  i,  286 ;  geometric 
mean,  i,  288 ;  median,  i,  288 ; 
weighted  mean,  i,  289 ;  proposed 
regulation  of  money  by,  i,  437. 

India,  English  rule  in,  i,  25 ;  hoarding 
in,  i,  73 ;  drain  of  specie  to,  i,  242 ; 
silver  coinage  stopped  in  1893,  i, 
279  ;  foreign  exchanges  under  rupee 
standard,  i,  461. 

Indirect  taxes,  ii,  552. 

Industrial  Councils,  ii,  295. 

Industrial  democracy,  ii,  297. 

Industrial  Revolution,  i,  35. 

Industriestaat,  argument  against  in 
Germany,  i,  533. 

Inelastic  demand,  i,  137. 

Inequality,  see  Contents,  ch.  55 ;  also 
ii,  207 ;  inequality  of  incomes  and 
maximum  well-being,  i,  132. 

Inheritance,  importance  for  distribu- 
tion, ii,  266 ;  justification  of,  ii,  267, 
535. 

Inheritance  taxes,  ii,  532. 


Instinct  of  acquisition,  i,  118. 

Instinct  of  contrivance,  i,  72. 

Insurance,  workmen's,  see  Contents, 
ch.  60. 

Insurance  of  deposits,  i,  386 

Integration  of  industry,  i,  60. 

Intensive  cultivation,  ii,  75. 

Interest,  general  statement,  see  Con- 
tents, chs.  38-40 ;  how  affected  by 
changing  prices,  i,  301 ;  not  affected 
by  quantity  of  money,  i,  346,  ii,  8 ; 
how  affected  by  bank  reserves,  i,  347 ; 
possibly  negative,  ii,  23 ;  steadiness 
of  rate  in  modern  times,  ii,  30 ;  why 
prohibited  in  medieval  times,  ii,  36; 
on  durable  goods  such  as  dwellings, 
ii,  40 ;  variations  between  different 
regions,  ii,  45 ;  justification  of,  ii, 
48 ;  how  rate  determines  selling 
price  of  land  and  securities,  ii,  103 ; 
how  related  to  business  profits,  ii, 
187,  191. 

Internal  economies,  i,  190. 

Internal  tax,  on  commodities,  ii,  553. 

International  bimetallism,  probable 
effects,  i,  282. 

International  borrowing,  effects  on 
imports  and  exports,  i,  467,  ii,  46. 

International  Harvester  Company,  i, 
52. 

International  Paper  Company,  i,   61. 

International  trade,  see  Contents,  Bk. 
IV ;  connection  with  theory  of 
prices,  i,  429 ;  extent  of  gain  from, 
i,  502 ;  how  related  to  non-competing 
groups,  ii,  161. 

Interstate  Commerce  Act  of  1887,  ii, 
400,  437. 

Investment,  promoted  by  corporations, 
i,  90;  in  relation  to  saving,  i,  174; 
maladjustment  in,  i,  399. 

Iron,  how  far  supply  elastic,  i,  147. 

Iron  and  steel  manufacture,  statistics 
on,  i,  49 ;  transformation  since  1890, 
i,  58 ;  annual  output  since  1800,  i, 
69;  elaborate  plant,  i,  71. 

Italy,  international  trade  illustrated, 
1,494. 

Jackson,  C.  L.,  i,  101. 

Japan,  international  trade  illustrated, 

i,  486. 
Jenks,  J.  W.,  ii,  501. 
Jevons,  W.  S.,  i,  389,  442,  ii,  13,  427. 
Jews,  why  money-lenders  in  medieval 

times,  ii,  36. 
Johnson,  A.  S.,  ii,  125. 
Johnson,  E.  R.,  ii,  501. 


INDEX 


571 


Joint  cost,  theory  ol,  i,  214;    applica- 
tion to  railways,  ii,  395. 
Joint  demand,  i,  218. 
Juglar,  C,  i,  442. 

Kartell,  ii,  445. 

Kautsky,  K.,  ii,  502. 

Kemmerer,  E.  W.,  i,  442. 

Keynes,  J.  M.,  i,  442. 

Kingsley,  Mary,  i,  226. 

Knickerbocker  Trust  Company,  i,  391. 

Kropotkin,  ii,  69. 

Krupp,  i,  58. 

Kuczynski,  ii,  247. 

Labor,  what  is  meant  by,  i,  8 ;    pro- 
ductive   and    unproductive,    i,    16 ; 
predatory,  i,  20. 
Labor  legislation,  see  Contents,  ch.  58 

how  far  socialistic,  ii,  479. 
Labor  supply,  a  cause  of  external  econ- 
omies,   i,    190;     in    buUding    opera- 
tions,   illustrates   joint   demand,    i, 
218. 
Labor  theory  of  value,  ii,  154. 

Labor  unions,  see  Contents,  ch.  57. 

Laborers,  unskilled,  why  wages  low 
ii,  146;  would  be  high  if  scarce,  ii. 
177. 

Landry,  A.,  ii,  278. 

Land  taxes,  see  Contents,  ch.  70. 

Land  tenure,  see  Contents,  ch.  42. 

Large-scale  production,  see  Contents, 
ch.  4 ;  connection  with  combination, 
ii,  452. 

Latin  Union,  i,  274. 

Laughlin,  J.  L.,  i,  442. 

Law,  in  relation  to  productive  labor, 
i,  28. 

Law's  notes,  i,  314. 

Lawyers,  productive  laborers,  i,  23. 

Leclaire,  ii,  336,  338. 

"Legitimate"  business,  i,  29. 

"Legitimate"  profits,  ii,  195. 

Leisure  class,  how  it  emerges,  ii,  274 ; 
justification  of,  ii,  275. 

Le  Rossignol,  J.  E.,  ii,  502. 

Leroy-Beaulieu,  P.,  ii,  562. 

Levasseur,  E.,  ii,  278. 

Lewis  and  Clark's  expedition,   i,  127. 

Liberty,  restriction  of,  ii,  283;  under 
socialism,  ii,  482. 

Liebermann,  i,  101. 

Liefmann,  ii,  501. 

Limitation  of  output,  ii,  308. 

Limited  liability,  i,  81. 

Limited  coinage  in  1878  and  1890,  i, 
277. 


Limping  standard,  in  France,  i,  275; 
in  United  States,  i,  276. 

List,  F.,  i,  527. 

Living  wage,  a  hazy  notion,  ii,  331; 
in  relation  to  taxation,  ii,  522. 

Locke,  ii,  273. 

London,  birthrates  in  different  quar- 
ters, ii,  242,  243;  distribution  of 
incomes,  ii,  256,  257. 

Lowell,  A.  L.,  ii,  432. 

Machinery,  and  identical  movements, 
i,  36;    connection  with  tariff  prob- 
lems in  United  States,  i,  541. 
Macrosty,  ii,  501. 
McCulIoch,  ii,  510. 
McKay,  i,  114. 

"Making  work,"   effect  on  wages,   ii, 
210;    no  inducement  to,  under  so- 
cialism, ii,  486. 
Malthus,  ii,  225,  228,  229,  240,  245. 
Malthusianism,  ii,  333,  485. 
Mantoux,  i,  105. 

Margin  of  cultivation  defined,  ii,  66. 
Marginal  producers,  i,  179. 
Marginal  utility,  i,  121 ;    of  money,  i, 
124  ;   ultimate  determinant  of  value, 
ii,  157 ;  see  also  Marginal  vendibility. 
Marginal  vendibility,  i,  123,  134,  142, 
148,    171,    179;     see   also    Marginal 
utility. 
Marriage,  slight  variation  of  rates,  ii, 

240 ;  average  age  at,  ii,  241. 
Marshall,  A.,  i,  124,  179,  189,  ii,  102, 

181,  184,  277. 
Martin,  ii,  172. 
Marx,  K.,  ii,  57,  364,  467,  475,  497,  498, 

502. 
Massachusetts,    birthrates    of    foreign 
born  and  natives,  ii,  247 ;   Ten  Hour 
Act,    ii,    320 ;     mill    conditions    in 
earlier  times,  ii,  321 ;    railway  com- 
mission, ii,  435. 
Maximum  happiness,  i,  132. 
Mayr,  G.,  ii,  239,  278. 
Meade,  E.  S.,  ii,  502. 
Medium  of  exchange,  i,  110,  223. 
Mercantilism,  i,  475,  507,  537. 
Mergenthaler  linotype,  ii,  114,  115. 
Metals,  relative  production  of  different, 

i,  225. 
Metaj^er  tenure,  ii,  79. 
Mexican  silver  supply,  i,  253. 
Meyer,  R.,  ii,  255,  265. 
Michigan,    birthrates   of   native   bom 

and  foreign  born,  ii,  243. 
Milk,  wasteful  competition  in  supply 
i,  64  ;  "  postage  stamp  rate  "  on,U,  67 


572 


INDEX 


Mill,  J.  S.,  1,  105,  237,  544,  ii,  108,  154, 
252,  268,  328,  422. 

Mines,  subject  to  diminishing  returns, 
i,  184  ;  rent  of,  ii,  98. 

Minimum  for  efficiency,  i,  95. 

Minimum  wages,  ii,  331 ;  in  relation  to 
taxation,  ii,  521. 

Mint  price  of  gold,  i,  229. 

Mitchell,  W.  C,  i,  285,  291,  313,  443. 

Mombert,  ii,  243. 

Money,  Cliiozza,  ii,  255,  258. 

Money,  see  Contents,  Bk.  Ill ;  what  is 
meant  by  the  term,  i,  110,  432,  433 ; 
under  socialism,  ii,  470. 

Money  incomes,  wherein  high  range 
advantageous,  i,  497,  503,  ii,  162. 

Monopoly,  see  Contents,  chs.  15,  45, 
65 ;  how  connected  with  internal 
economies,  i,  191  profit  defined,  i, 
198;  industrial,  ii,  113;  gains 
sometimes  defined  as  a  kind  of  rent, 
ii,  123;  of  labor,  ii,  135,  305;  the 
essential  characteristic  of  public 
service  industries,  ii,  420,  429  ;  what 
are  earmarks  of,  ii,  461 ;  effect  of 
tax  on  monopolized  commodities,  ii, 
556  ;  fiscal,  ii,  560. 

Morgan,  J.  P.,  89,  326,  ii.  416. 

Mortgage  banks,  i,  326. 

Moses,  i,  307. 

Motives  of  business  men,  ii,  175,  205, 
267,  536. 

Multiple  standard  discussed,  i,  434. 

Munro,  ii,  432. 

Napoleon,  i,  24. 

National  banking  system  in  United 
States,  i,  371. 

National  Monetary  Commission,  i,  442. 

Nelson  Manufacturing  Company,  ii, 
336. 

New  York  banks,  position  in  American 
banking  system,  i,  374,  407. 

New  York  Central  Railway,  ii,  407. 

New  York  City,  value  of  land  in,  ii,  86. 

New  Zealand,  death  rate  in,  ii,  228 ; 
compulsory  arbitration  law,  ii,  348, 
350;   old-age  pensions,  ii,  360. 

Newsholme,  ii,  228,  232,  239,  244. 

Non-competing  groups,  described,  ii, 
141 ;  connection  with  theory  of  in- 
ternational trade,  ii,  161. 

Non-material  wealth,  i,  19. 

Northrop  loom,  ii,  114,  115. 

Note  brokers  in  United  States,  i,  344. 

Officii  buildings  in  American  cities,  ii, 

85,  88,  89. 


Ogle,  ii,  241. 

Ohio  Life  and  Trust  Company,  i,  390. 

Oil,  illustrates  joint  cost,  i,  217. 

Old-age  pensions,  ii,  360,  370. 

Open  shop,  ii,  304. 

Open  union,  ii,  303. 

Oregon  question,  in  reference  to  free 
trade,  i,  509. 

Osier,  ii,  485. 

"Outside  paper,"  when  bought  by 
banks,  i,  344. 

Overcapitalization  of  railways,  ii,  409. 

Overend,  Gurney  and  Company,  i,  391. 

Overinvestment,  see  Contents,  ch.  41 ; 
also  i,  397. 

Overproduction,  see  Contents,  ch.  41 ; 
easily  remedied  under  socialism,  ii, 
481. 

Overvalued  metal,  under  double  stand- 
ard, i,  263. 

Owen,  R.,  ii,  137. 

Pain  economy,  i,  127. 

Panama  canal,  illustrates  uncertainty 

of  labor's  product,  ii,  216. 
Pantaleoni,  M.,  i,  220. 
Paper   money,   see   Contents,    ch.    23; 

based    on    index    numbers,    i,    436 ; 

efTect  on  foreign  exchanges,  i,  462. 
"Parasitic"  industries,  i,  485,  ii,  162. 
Pareto,  ii,  265. 
Paris,  birthrates  in  different  quarters, 

ii,  242. 
Partnership,  legal  position  of,  i,  80. 
Patents,    articles    illustrate    monopoly 

prices,   i,   206 ;     justification  of,   ii, 

114;  term  of,  ii,  114. 
Patten,  i,  127. 
Paulsen,  ii,  276. 
Pawnbroker's  loans,  ii,  35,  47. 
Perkin,  i,  101. 
Phelps,  ii,  232. 

"Philanthropy  at  4  per  cent,"  ii,  47. 
Piecework,  ii,  307. 
Pigou,  A.  C,  i,  545,  ii,  265,  277. 
Pioneer  cultivation,  ii,  68. 
Pleasure  economy,  i,  127. 
Pohle,  L.,  i,  545. 
Pools  among  railways,  ii,  403. 
Poor  laws,  ii,  369. 
Population,  see  Contents,  chs.  53,  54 ; 

movement  of,  within  a  group,  ii.  158. 
Positive  checks,  ii,  230. 
"  Postage  stamp  rate,"  on  railways,  for 

milk,  ii,  67. 
Postal  rate,  uniform  because  of  monop- 
oly, i,  207;    relation  to  expenses,  ii, 

422. 


INDEX 


573 


Potential  competition,  ii,  154. 

Potosi,  silver  mines  of,  i,  253. 

Predatorj'  cultivation,  i,  534,  ii,  73. 

Predatory  labor,  i,  20. 

"Premium  on  currency"  in  1903  and 
1907,  i,  409. 

Prestige  value,  i,  126. 

Preventive  checks,  ii,  230. 

Price,  defined,  i,  113. 

Prices  in  United  States,  1890-1906,  i, 
291 ;   1860-80,  i,  313. 

Printers,  how  affected  by  inventions; , 
ii,  212. 

"Private  banks"  in  Germany,  i,  365. 

Private  property,  see  Property. 

Prizes,  effect  on  remuneration,  ii,  134, 
181. 

Producer's  capital,  i,  70. 

Producer's  surplus,  i,  187,  ii,  63. 

Productive  and  unproductive  labor,  i, 
16. 

Producti\aty  of  capital,  ii,  11. 

Professors'  salaries,  why  low,  ii,  132. 

Profit  sharing,  see  Contents,  eh.  59. 

Progressive  taxation,  ii,  509,  513,  525 ; 
as  to  inheritance,  ii,  532. 

Property,  grounds  of,  see  Contents, 
chs.  55,  66,  67;  in  land,  ii,  81,  82. 

Protection,  see  Contents,  chs.  36,  37. 

Prussia,  distribution  of  incomes,  ii, 
254 ;  of  property,  ii,  257 ;  purchase 
of  railways,  ii,  427 ;  income  tax 
sj'stem,  ii,  527. 

Psychic  income,  i,  131. 

Psychology,  relation  to  industrial 
crises,  i,  391 ;  to  business  ambition, 
i,  103,  ii,  175,  207 ;  to  wages  system, 
ii,  284 ;  to  problems  of  socialism,  ii, 
489,  493. 

Public  debts,  how  affected  by  price 
changes,  i,  294 ;  see  also  War  debts. 

Public  goods,  i,  5. 

Publicity,  for  control  of  corporations, 
ii,  435,  460. 

Public  ownership,  see  Contents,  ch.  64  ; 
how  far  socialistic,  ii,  478 ;    how  re- 
lated to  taxation,  ii,  506. 
"Public   service"   industries  and   cor- 
porations, i,  83,  ii,  116,  420. 
"Public  utilities,"   right  to  strike  in, 

ii,  291,  292. 
Pullman,  town  of,  ii,  96. 

Quantity  theory  of  money,  i,  233,  415. 

Race  .«uicide,  ii,  251. 
Rae,  .J.,  ii,  385. 
Raiffeisen,  ii,  379. 


Railways,  see  Contents,   chs.   62,    63 ; 

difficulty  of  supervising  \ahoT,  i,  56 ; 

construction  connected  with  crises, 

i,  392,  395. 

Rapidity  of  circulation,  as  to  money,  i, 

236 ;  as  to  goods,  i,  237. 
Rappard,  ii,  31. 

Ratio  (coinage;  between  gold  and  sil- 
ver, i,  262  ;   in  United  States,  i,  264  ; 
in  France,  i,  262,  270. 
Ratio  (market)  between  gold  and  sil- 
ver, change  after  1873,  i,  274  ;  course 
since    1893,    i,    280;     steadiness    of, 
promoted    by    bimetallism,    i,    272, 
281 ;  how  probably  affected  by  inter- 
national bimetallism,  i,  281. 
"Raub-bau,"  ii,  73. 
Raw  materials,   give  no  occasion  for 
protection    to    young    industries,    i, 
527,  543. 
Real  estate  agents,  ii,  90,  94. 
Rebates,  ii,  402,  448. 
Reciprocal  demand,  theory  of,  i,  495, 

497. 
Reciprocity,     inevitable     as     regards 
shipping,  i,  531 ;  with  Canada,  i.  477, 
509 ;    how  far  expedient  for  Great 
Britain,  i,  536. 
Regressive  taxation,  ii,  560. 
Reichsbank,  description  of,  i,  364. 
Rent,  see  Contents,   chs.  42,   43,   44 ; 
not  a  monopoly  return,  ii,  113,  123; 
uses   of    the    term,   ii,    124 ;    theory 
of,   how  far  applicable   to   business 
profits,  ii,  180 ;  as  distinguished  from 
rental,  ii,  540. 
Representative  firm,  ii,  184. 
Reserve  cities,  i,  373. 
Resumption    of    specie    paj-ments,    in 
United  States  in  1879,  i,  318;    what 
method  desirable,  i,  315. 
Retail  prices,  how  affected  by  marginal 
vendibility,  i,   150 ;    how  related  to 
wholesale  prices,  i,  150 ;  how  affected 
by  custom,   i,    150 ;    advantages  of 
fixed,  i,  152. 
Retail  trading  on  large  scale,  i,  56. 
Rhodes,  C,  i,  201. 
Ricardo,  D.,  ii,  73,  102,  154,  159. 
Rignano,  E.,  ii,  270. 
Ripley,  W.  Z..  ii,  501. 
Rising    prices,    how    connected    with 
prosperity,  i,  297  ;  effect  on  wages,  i, 
1      298 ;  effect  on  business  profits,  i,  299. 
Rochdale  Pioneers,  ii.  374. 
Rodbertus,    explanation   of    crises   by, 

ii.  57;  on  unemployment,  ii,  364. 
Roscher,  W.,  i,  105. 


574 


INDEX 


Rothschild,  i,  89,  326,  ii,  48. 
Roundabout  production,  ii,  9,  12,  17. 
Rowntree,  B.  S.,  i,  93. 
Royalties  on  mines,  ii,  102. 
Rubinow,  I.,  ii,  385. 
"Runs"  on  banks,  i,  402,  405. 
Rupee  in  India,  i,  279. 
Russell,  B.,  ii,  70. 

Saver's  rent,  ii,  28 ;  in  relation  to  taxa- 
tion, ii,  517. 

Saving,  stimulated  by  corporations,  i, 
83  ;  how  far  dependent  on  a  reward, 
ii,  21 ;   marginal,  ii,  26. 

Saving  and  capital,  i,  72. 

Savings  banks,  i,  74,  325. 

Scab,  ii,  313. 

Schffiffle,  A.,  ii,  502. 

SchmoUer,  G.,  ii,  276,  277. 

SchiiUer,  R.,  i,  544. 

Schulze-Delitzsch,  ii,  378. 

Scissors,  simile  of,  to  illustrate  theory 
of  value,  i,  180,  188. 

Scotch  banking  system,  i,  355. 

Seager,  H.  R.,  ii,  385. 

Seasonal  price,  relation  to  market 
price,  i,  145. 

Securities  not  capital,  ii,  5. 

Seigniorage,  i,  228,  268. 

Seligman,  E.  R.  A.,  ii,  562. 

Senior,  i,  307. 

Servants,  high  wages  in  United  States, 
i,  505,  ii,  132,  299;  per  family  in 
London,  ii,  255. 

Share  farming,  ii,  79. 

Sharfman,  I.  L.,  ii,  501. 

Sherman  Act,  ii,  403,  444,  461. 

Shipbuilding  in  the  United  States  and 
Great  Britain  contrasted,  i,  189. 

Shipping,  effects  of  charges,  on  imports 
and  exports,  i,  472;  political  argu- 
ments for  subsidies,  i,  529. 

Shirtwaist  workers,  ii,  149. 

Shop  Committees,  ii,  295. 

Sickness,  insurance  against,  ii,  357. 

Siemens,  W.,  ii,  172,  424. 

Silk  duties  in  United  States,  possible 
effects  of,  i,  528,  542. 

Silver,  drain  to  the  East,  i,  242 ;  posi- 
tion in  sixteenth  century,  i,  253 
production  after  discovery  of  Amer- 
ica, i,  253;  production  1871-1905 
i,  279 ;  sale  of  silver  bullion  to  Brit- 
ish government  during  Great  War 
1,  2'78. 

Silver  certificates,  i,  278. 

Silver  dollar,  i,  261,  264;  free  coinage 
dropped  in  1873,  i,  276, 


Single  tax,  ii,   80 ;    with  reference  to 
urban  land,  ii,  104  ;  with  reference  to 
mines,  ii,  106. 
Site  rent,  ii,  67. 
Skates,  American  imitated  in  Germany, 

i,  541. 
Skelton,  O.  D.,  ii,  602. 
Slag,  illustrates  joint  cost,  i,  216. 
Slatin,  i,  227. 
Sliding  scale,  ii,  343. 
Smith,  Adam,  i,  41,   105,   244,  ii,  52, 

137,  191. 
Socialism,  see  Contents,   chs.   64,   65 ; 
attitude     toward     classification     of 
incomes,  ii,  126. 
Social  stratification,  ii,  137. 
Soetbeer,  i,  256. 

Soldiers    and    sailors,    productive    la- 
borers, i,  24. 
Sombart,  ii,  265. 

South  African  gold  supply,  i,  258,  ii,  100. 
Spargo,  J.,  ii,  502. 

Specie  premium,  general  discussion,  i, 
310;  in  United  States  during  Civil 
War,  i,  3x2 ;  connection  with  foreign 
exchange  x,  462. 
Speculatioi  .  see  Contents,  ch.  11;  in 
relation  vi  "corners,"  i,  210;  in  real 
estate,  ii,  94 ;  in  railway  securities, 
ii,  414. 
Spendthrift  loans,   effects  on  rate  of 

interest,  ii,  34. 
Sprague,  O.  M.  W.,  i,  442. 
Stabilized  dollar,  i,  437. 
Stadtwirthschaft,  i,  39. 
Stahlwerksverband,  i,  62. 
Standardizing,  i,  161. 
Standard    of    living,     and    protective 
tariff,  i,  512;    how  it  affects  wages, 
ii,  237,  238. 
Standard  Oil  Company,  i,  217,  ii,  402, 

410,  443,  -146,  449. 
Standard  rate,  of  union  wages,  ii,  307 ; 

as  to  prices,  ii,  457. 
Stanwood,  E.,  i,  545. 
State  banks  in  United  States,  i,  423. 
Static  state,  i,  172,  ii,  252. 
Statistics  of  capital  often  misleading, 

ii,  7. 
Steel  Corporation  (U.  S.),  and  vertical 
combination,  i,  61 ;   how  affected  by 
rising  prices,  i,  299 ;  ii,  456. 
Stephenson,  i,  35,  40,  ii,  172,  424. 
Sterling  exchange,  i,  449. 
Steuart,  J.,  i,  307. 
Stock  Exchange  operations,  i,  26,  87 ; 

evils  of,  i,  164  ;  clearings,  i,  418. 
Stoppage  at  the  source,  ii,  522. 


INDEX 


575 


Street  railways,  uniform  fare  the  result 
of  monopoly,  i,  207. 

"Strike-breakers,"  ii,  289. 

Strikes,  defined,  ii,  288 ;  violence  in, 
ii,  289,  314 ;  the  right  to  strike,  ii, 
287,  290. 

Subsidiary  coin,  i,  267. 

Subsistence  and  labor  eflBciency,  i,  93. 

Subsoil  draining,  ii,  77. 

Suffolk  Bank  system,  i,  340. 

Sugar  refining,  i,  59,  62 ;  bounties  of 
1890  in  United  States,  i,  531 ;  Refin- 
ing Co.,  ii,  443,  446 ;  taxation  in 
Germany,  ii,  553  ;  taxation  in  United 
States,  ii,  559,  561. 

Super-tax,  British,  ii,  526. 

Supply  curve,  i,  143. 

Surnames,  illustrating  simpler  division 
of  labor,  i,  31. 

Surplus,  essential  for  making  capital, 
i,  71  ;  its  accumulation  irksome,  ii, 
20. 

Surtax,  United  States,  ii,  531,  532. 

"Sweating,"  ii,  330. 

"Sweating"  of  coins,  i,  227. 

"Tantiemes,"  ii,  194. 

"Tariff  the  mother  of  trusts,"  i,  521. 

Taussig,  F.  W.,  i,  545,  ii,  115. 

Tea  and  coffee,  British  taxes  on,  i,  519  ; 

how    possibly    cheaper    in    United 

States  because  of  protection,  i,  524 ; 

taxation  of,  ii,  560,  561. 
Technical  education  and  efficiency  of 

industry,  i,  98. 
Telephone,    rates  illustrate   monopoly 

value,  i,  206 ;    should  be  monopoly, 

ii,  422. 
Tenancy  in  United  States,  ii,  79. 
Textile  inventions,  i,  34. 
Thomas  process,  i,  216. 
Three-cornered  trade,  i,  454, 
Thiinen,  ii,  67. 
"Tie-up,"  ii,  315. 
Tin  mines  of  Cornwall,  ii,  101. 
Tobacco,  a  medium  of  exchange,  i.  111 ; 

how  taxed  in  Great  Britain,  i,  519; 

fiscal  monopoly  of,  ii,  561 ;    Trust, 

see  American  Tobacco  Company. 
Total  utility,  i,  120. 
Toynbee,  A.,  i,  105. 
Trade  agreements,  ii,  346. 
Trademark,  effect  on  value  and  profits, 

i,  175 ;  relation  to  dumping,  i,  208. 
Trade  unions,   see   Contents,    ch.   57; 

out-of-work  benefit,  ii,  366. 
Transferability    of    corporate     shares, 

consequences  of,  i,  85. 


Transportation  Act  of  1920,  ii,  439. 

Transvaal  mines,  i,  258. 

Travelers'  expenses,  effects  on  imports 

and  exports,  i,  471. 
Truck-farm  argument  for  protection,  i, 

510. 
Trust  companies,  i,  345. 
"Trusts,"  see  Contents,  ch.  65;    and 

horizontal  combination,  i,  60 ;    how 

far  promoted  bj'  protection,  i,  621 ; 

how  far  monopolies,  ii,  118;    origin 

of  name,  ii,  443. 
Tufts,  ii,  276. 

Underfed  laborers,  i,  93. 

Undervalued  metal,  under  double 
standard,  i,  263. 

Unearned  gains,  ii,  203. 

Unearned  increment,  ii,  80,  82;  on 
urban  sites,  ii,  104 ;  on  railways,  ii, 
407. 

Unemployment,  not  remediable  by 
protection,  i,  510;  strengthens 
fallacy  of  "making  work,"  ii,  211, 
308 ;  insurance  and  other  provision 
against,  ii,  364. 

United  States,  and  geographical  divi- 
sion of  labor,  i,  43,  44  ;  protection  in, 
i,  538 ;  distribution  of  income  in, 
ii,  258 ;  income  taxes  in,  ii,  529. 

"United  States  notes,"  i,  318. 

United  States  Steel  Corporation,  see 
Steel  Corporation. 

Urban  sites,  causes  of  advantages,  ii, 
84 ;  relation  to  prices,  ii,  84 ;  inci- 
dence of  taxes  on,  ii,  541. 

Utility,  in  relation  to  value,  i,  116; 
diminishing,  i,  118;  total,  i,  120; 
marginal,  i,  121 ;  marginal,  of  money, 
i,  124 ;  to  sellers,  why  usually  of  no 
effect  on  price,  i,  153. 

Value  in  exchange,  defined,  i.  111; 
different  meanings  of,  i,  112;  of 
money,  i,  232. 

Vanderbilt,  ii,  48,  414. 

Veblen,  T.,  i,  105. 

Vertical  combination,  i,  60. 

Vested  interests,  as  to  agricultural 
land,  ii,  82 ;  as  to  urban  sites,  ii,  107 ; 
as  to  corporate  securities,  ii,  120, 
425. 

Vienna,  birthrates  in  different  quar- 
ters, ii,  242. 

Violence  in  strikes,  ii,  289,  314. 

Wages,  money,  rates  vary  between 
countries,  i,  480 ;    effect  on  gain  from 


576 


"INDEX 


international  trade,  i,  502;  what 
determines  general  rate,  sec  Con- 
tents, ch.  52;  relation  to  standard 
of  living,  ii,  237  ;  effect  of  workmen's 
insurance  on,  ii,  356. 

Wages  argument  for  protection,  i,  512. 

Wages  system,  see  Contents,  ch.  56; 
drawbacks  of,  ii,  284 ;  necessity  of, 
ii,  473. 

Wagner,  A,,  i,  545,  ii,  265,  562. 

WaIE;rj:.Ui,_445. 

Walker,  F.  A.,  ii,  181. 

WaiHpum.  illustrates  influence  of  con- 
vention on  money,  i,  225. 

War  debts,  a  kind  of  spendthrift  bor- 
rowing, ii,  5,  37 ;  effects  on  rate  of 
interest,  ii,  31,  37;  effects  on  supply 
of  real  capital,  ii,  38 ;  incidence  of 
the  burden,  ii,  39,  40 ;  sec  also  Pub- 
lic debts. 

War  Industries  Board,  i,  285. 

"Wash  sales,"  i,  166. 

Water,  as  a  free  good  and  as  an  eco- 
nomic good,  i,  3,  4. 

Water  power,  brings  conditions  of 
varying  cost,  i,  185 ;  how  far 
suited  for  public  management,  ii, 
425. 

Watt,  J.,  i,  35,  ii.  172,  424. 

Wealth,  see  Contents,  ch.  1. 

Webb,  B.,  ii.  385,  502.; 

Webb,  S.,  ii,  385,  502./ 

Welfare  arrangements,  ii,  342. 

WeUs,  H.  G.,  ii,  502. 


Welsbach  mantles,  i,  203. 

Westminster,  Duke  of,  ii,  105. 

Wheat,  cvUturo,  i,  55  ;  seasonal  supply 
virtually  fixed,  i,  147 ;  how  price  may 
be  affected  by  corners,  i,  212 ;  why 
exported  from  United  States,  i,  482 ; 
different  positions  of  United  States 
and  Russia  as  exporters  of,  i,  502 ; 
predatory  cultivation,  ii,  74;  yield 
per  acre,  ii,  74. 

Whitaker,  A.  C,  i,  544. 

Wicksteed,  P.  H.,  i,  110,  220. 

Wiebe,  i,  254. 

Wieser,  F.,  i,  220. 

Wilcox,  D.  F.,  ii.  502. 

Willcox,  W.  F.,  ii,  239. 

Williams,  G.  F.,  i,  201. 

Withers,  H..  i,  442. 

Wolfe,  ii.  243. 

Wool,  why  coarse  grades  imported  into 
United  States,  i,  487 ;  varying 
natural  conditions  in  United  States, 
i,  491 ;  clothing,  amount  of  customs 
tax  on,  ii,  559. 

Wool-scouring  and  utilization  of  grease, 
i,  54,  216. 

Women,  wages  of,  ii,  149. 

Workmen's  insurance,  see  Contents, 
ch.  60. 

Works  Councils,  ii.  295. 

Young,  A.  A.,  ii,  247. 

Young  industries,  protection  to,  i,  526. 

Yule,  ii,  239. 


"t- 


^-^^^^^'•^^fe^. 


%(^f 


(/. 


-^9 


;  '"^^ 


^  1^.-^5 


^^ 


y^nf/Y^J 


^^H^ 


^::p<^ 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


AA    000  824  744    7 


